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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 333-98077
Quality Distribution, LLC
(Exact Name of the Registrant as Specified in its Charter)
DELAWARE 04-3668323
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3802 Corporex Park Drive
Tampa, Florida 33619
(Address of principal executive offices)(zip code)
Registrant's telephone number, including area code:
813-630-5826
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
At June 30, 2002, the market value of registrant's common equity held by
non-affiliates was zero.
As of December 31, 2002, the registrant had 100 no par value membership
interest units outstanding, all of which were held by affiliates.
Documents Incorporated by Reference: None.
PART I
Item 1. BUSINESS
GENERAL
Quality Distribution, LLC (the "Company" or "QD LLC") is a Delaware
limited liability company formed on April 14, 2002. The Company's sole member is
Quality Distribution, Inc. ("QDI Inc."), a Florida corporation. On May 30, 2002,
QDI Inc. completed an exchange offer for its public debt, at which time QDI Inc.
transferred substantially all of its assets and liabilities (other than certain
contract rights which by their terms cannot be assigned without the consent of
the other parties thereto) to the Company, consisting principally of the capital
stock of QDI Inc.'s operating subsidiaries. As a result, QDI Inc. has no
significant assets or operations other than the ownership of 100% of QD LLC's
membership units. The Company became the successor entity to QDI Inc. The
transfer of the net assets to the Company by QDI Inc. has been accounted for as
a transaction between companies under common control. As a result, QDI Inc.'s
historical accounting basis for the net assets has been carried over to the
Company. The Company's results of operations for periods prior to the transfer
represent the historical operating results for QDI Inc. As used in this report,
the terms "we," "our," "ours," and "us" refer to QD LLC and its consolidated
subsidiaries and their predecessors, unless the context otherwise requires or
indicates.
We are the largest bulk tank truck carrier in North America based on
bulk service revenues. Through a network of 153 terminals located across the
United States, Canada and Mexico, we transport a broad range of chemical
products and provide our customers with supplementary transportation services
such as dry bulk hauling, transloading, tank cleaning, third-party logistics,
intermodal services and leasing. Many of the chemical and chemical-related
consumer products we transport require specialized trailers and experienced
personnel for safe, reliable and efficient handling. We are a core carrier for
many of the Fortune 500 companies who are engaged in chemical processing,
including Dow Chemical Company, Procter & Gamble Company, E.I. DuPont and PPG
Industries.
In addition to our own fleet operations, we use affiliates and
owner-operators. Affiliates are independent companies that, through
comprehensive contracts with us, operate their terminals exclusively for us.
Owner-operators are independent contractors who, through contracts with us,
supply one or more tractors and drivers for our own or our affiliate's use.
Management believes that the use of affiliates and owner-operators results in a
more flexible cost structure, increases our asset utilization and increases
return on invested capital. The Company is a holding company and operates
principally through three main transportation subsidiaries: Quality Carriers,
Inc ("QCI"), Transplastics ("TPI") and Levy Transport, Ltee ("Levy"), and
through Quala Systems, Inc. ("QSI"), a nation-wide tankwash subsidiary. Through
the principal transportation subsidiaries, as of December 31, 2002, we operated
7,565 trailers, of which 6,196 were owned or leased by us, and 3,363 tractors,
of which 793 were owned or held directly under lease by us.
The for-hire tank truck industry is highly fragmented and we believe
it consists of approximately 200 tank truck carriers, with the top five
carriers representing approximately $1.6 billion or approximately 31% of
estimated 2002 for-hire tank truck industry revenues. The industry continues to
experience consolidation. We believe such consolidation is primarily the result
of economies of scale in the provision of services to a larger customer base,
cost-effective purchasing of equipment, supplies and services by larger
companies, high insurance premiums and the decision by many smaller, capital
constrained operators to sell their trucking businesses rather than make
substantial investments to modernize their fleets. As a result of our leading
market position and decentralized operating structure, we believe we are well
positioned to benefit from these current industry trends.
DEVELOPMENT OF OUR COMPANY
Our parent company, QDI Inc., was formed in 1994, as a holding
company. One of our main transportation subsidiaries QCI, was the product of
the merger in 1998 of two large tank truck carriers, Montgomery Tank Lines,
Inc.("MTL") and Chemical Leaman Tank Lines, Inc. ("CLC" or "CLTL"). QDI Inc. is
owned principally by Apollo Investment Fund III, L.P., Apollo Overseas Partners
III, L.P., and Apollo (U.K.) Partners III, L.P., each of which is an affiliate
of Apollo Management, L.P. As of December 31, 2002, Apollo owned 87.2% of QDI
Inc.'s common stock, certain other investors owned 6.4% and our management
owned approximately 6.4%. On a fully diluted basis
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after giving effect to stock options and warrants, at December 31, 2002, Apollo
owned approximately 78.1% of QDI Inc.'s common stock, certain other investors
owned 13.5% and our management owned approximately 8.4%.
All of our domestic direct and indirect subsidiaries have guaranteed
our borrowings under our credit agreement and our senior subordinated secured
notes.
SERVICES PROVIDED
BULK TRANSPORTATION SERVICES
We are primarily engaged in the business of bulk transportation of
liquid and dry chemical products. Business services are provided through
Company-owned and affiliate terminals. As of December 31, 2002, 89 of 153
locations were company operations and the remaining locations were affiliate
operations. Owner-operators are heavily relied upon to fulfill driver and
tractor needs at both Company and affiliate terminals. We believe the
combination of the affiliate program and the emphasis on the use of
owner-operators result in an efficient and flexible operating structure that
provides superior customer service.
AFFILIATE PROGRAM
Affiliates are established and maintained by their owners as
independent companies with individualized, parochial profit incentives designed
to stimulate and preserve the entrepreneurial motivation common to small
business owners. Each affiliate enters into a comprehensive contract with QCI
pursuant to which the affiliate is required to operate its bulk tank truck
enterprise exclusively for and on behalf of QCI. Each affiliate is supported by
our corporate staff and is linked via computer to central management's
information systems located at the Tampa, Florida headquarters of QDI. New
affiliate candidates are ordinarily selected from QCI's management/employee
pool, thereby "jump-starting" the new business opportunity with an experienced,
savvy owner/manager, significantly reducing "ramp-up" time, while
simultaneously improving the chances for both operating and financial success.
Affiliates gain multiple benefits from their relationship with QCI,
such as improved equipment utilization through access to our network of
operating terminals, access to and enhancement of our broad national and local
customer relationships, national and local driver recruitment programs,
standardized safety training (for drivers, tankwashers and mechanics) at our
five (5) Safety Schools, and expanded marketing and sales resources, combined
with sophisticated marketplace/competitive research. Affiliates gain further
value from QCI's management information systems which provide essential
operating and financial reports, while simplifying daily operating situations
with system-wide technology support (TMW Systems, Incorporated ("TMW")
dispatch/billing platforms and Qualcomm en-route electronic linkage with each
vehicle). Affiliates also derive significant financial benefit through our
purchasing leverage on items such as insurance coverage, tractors, trailers,
fuel, tires, health care, and other significant operating requirements.
Affiliates predominantly operate under the marketing identity of
Quality Carriers and typically receive a percentage of gross revenues from each
shipment they transport. Affiliates are responsible for their own operating
expenses, such as fuel, licenses and worker's compensation insurance. We pay
affiliates each week on the basis of completed billings to customers from the
previous week. Our weekly settlement program automatically deducts any amounts
advanced to affiliates (and their individual drivers) for fuel, insurance,
loans or other miscellaneous operating expenses, including rental charges for
QCI's tank trailers. We reimburse affiliates for certain expenses billed back
to customers, including fuel, tolls and scaling charges.
Our contracts with affiliates typically carry a term ranging from one
to five years and thereafter renew on an annual basis, unless terminated by
either party. Affiliate contracts uniformly contain restrictive covenants
prohibiting them from competing directly with QCI for a period of one year
following termination of the contract. In addition, affiliates are required to
meet all QCI standard operating procedures as well as being required to submit
regular financial statements.
Affiliates engage and/or employ their own drivers and personnel. All
affiliate personnel must meet our operating standards/requirements.
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Affiliates are required to pay for and provide evidence of their own
workers' compensation coverage, which must meet both Company-established and
statutory coverage levels. Affiliates are provided, as part of their contract,
auto and general liability insurance, subject to certain deductibles per
incident. Expenses exceeding the prescribed deductible limits of the affiliate
are the responsibility of QCI or its insurer. For an additional fee, our
subsidiary, Power Purchasing Inc. ("PPI"), makes available additional insurance
to affiliates for physical damage coverage, operating a tractor without a
trailer, health care, life insurance, and garage-keepers insurance.
DRIVERS AND OWNER OPERATORS
At December 31, 2002, we utilized 3,182 drivers. Of this total, 1,859
were owner-operators, 875 were affiliate company drivers and 448 were company
drivers.
OWNER-OPERATORS
QCI terminals and affiliates extensively utilize owner-operators.
Owner-operators are independent contractors who, through an exclusive contract
with QCI, supply one or more tractors and drivers for QCI or affiliate use. QCI
retains owner-operators under contracts generally terminable by either party
upon short notice.
In exchange for the services rendered, owner-operators are generally
paid a fixed percentage of the revenues generated for each load hauled or on a
per mile rate. The owner-operator pays all tractor operating expenses such as
fuel, physical damage insurance, tractor maintenance, fuel taxes and highway use
taxes. However, we reimburse owner-operators for certain expenses passed through
to our customers, such as fuel surcharges, tolls and scaling charges. QCI
attempts to enhance the profitability of our owner-operators through purchasing
programs that take advantage of our significant purchasing power. These programs
cover such operating expenses as fuel, tires, occupational accidental and
physical damage insurance.
Owner-operators utilized by QCI or an affiliate must meet specified
guidelines for driving experience, safety records, tank truck experience and
physical examinations in accordance with U.S. Department of Transportation
("DOT") regulations. We emphasize safety to our independent contractors and
their drivers and maintain driver safety inspection programs, safety awards,
terminal safety meetings and stringent driver qualifications.
DRIVER RECRUITMENT AND RETENTION
QCI and its affiliates dedicate significant resources to recruiting
and retaining owner-operators and our own company drivers. Company drivers and
owner-operators are hired in accordance with specific guidelines regarding
safety records, driving experience and a personal evaluation by our staff. We
employ only qualified tank truck drivers with a minimum of two years of
over-the-road, tractor-trailer experience. These drivers are required to attend
a rigorous training program conducted at one of our five safety schools.
Driver recruitment and retention is a primary focus for all operations
personnel. Each terminal manager has direct responsibility for hiring drivers.
We use many of the traditional methods of driver recruitment as well as using
many newer methods of driver recruitment, including the use of the Internet and
the efforts of the President's Team.
The President's Team is a group consisting of our very best drivers,
whose mission it is to recruit and retain drivers while promoting QCI to
customers. The equipment utilized by the President's Team distinguishes these
drivers, thereby providing another tool in our continuous driver recruiting
efforts. The President's Team maintains contact with new candidates throughout
the hiring process. They also provide insight on the issues important to our
current drivers and owner-operators. In 2001, a comprehensive Driver Excellence
Program was implemented to reward our best drivers with recognition and awards
based on meeting standards of excellence in productivity, safety and positive
Company image. QCI added a centralized recruiting department at the Tampa
corporate office during 2002.
4
OTHER PERSONNEL
At December 31, 2002, we employed 836 support personnel, including 217
employed at our corporate office in Tampa, Florida. Our field operations
consist of 619 employees, including 85 mechanics, 204 tank cleaners and 330
other support, clerical and administrative personnel.
Where appropriate, the field management is responsible for hiring
mechanics, customer service and tank wash personnel. We provide our employees
with health, dental, vision, life, and other insurance coverages subject to
certain premium sharing and deductible provisions. These and other insurance
programs are available to affiliates and owner-operators for a fee.
UNION LABOR
At December 31, 2002, we had 268 employees in trucking, maintenance or
cleaning facilities and approximately 85 employees of three affiliate terminals
who were members of the International Brotherhood of Teamsters.
CUSTOMER SERVICE, QUALITY ASSURANCE AND BILLING
Our Quality Assurance Program is designed to enable the achievement of
superior customer service through the development and implementation of
Standardized Operating Procedures for each area within our company. The
procedures provide guidance in such areas as marketing, contracts, dispatch and
terminal operations, driver hiring, safety and training, trailer operations,
tractor operations, administrative functions, payroll, settlements, insurance,
data processing and fuel tax administration.
The Company also has an Internal Audit department which helps monitor
and ensure compliance.
We have implemented a Quality Corrective Action procedure to identify,
document and correct safety and service non-conformance. This procedure collects
non-conformance data so that all levels of the organization can better
understand where processes breakdown causing a non-conformance. This information
is also reported back to many of our customers in the form of monthly service
reports. Service reporting is required by an increasing number of chemical
shippers.
During the third quarter of 2002, QCI completed its initiative to
centralize the billing function for all Company terminals and some affiliate
terminals in order to gain better quality control over the billing and
invoicing processes. At the same time, QCI completed its conversion to the TMW
billing application, which integrated the dispatch and billing systems. See
"Technology" section below.
MOBILE COMMUNICATIONS
Over 90% of our entire tractor fleet is equipped with the OmniTRACS(R)
mobile satellite communications system. This system provides continuous
monitoring and two-way communications with tractors in transit. The information
generated by this system is used to track load status, optimize the use of
drivers and equipment and respond to emergency situations.
TECHNOLOGY
In 2001, QCI purchased and began implementing a new operating system
for dispatching trucks. The system was purchased from TMW, a company with over
500 customer installations and a 40% market share in the bulk trucking market.
The rollout of this program was completed in the third quarter of 2002 for all
U.S. operations.
The TMW software enhances our ability to track our drivers, tractors,
trailers and manage the business better at a tactical level. The software
handles order entry, resource planning, dispatch, and communications, through
Qualcomm (Omnitracs) integration and auto-rating of invoices. The software is
another step in the continued upgrading of systems utilized in our trucking
subsidiaries: installation of an IBM storage and multi-server network, which
centralized the data and increased reliability, adding TMW for resource
tracking, completing Qualcomm
5
installation for communications and equipment location updates, introduction of
imaging at all locations, and the incorporation of all of this data into our
website at http://www.qualitydistribution.com. Information on our website is
not part of this report. These projects add to the productivity of our
employees and equipment, which we believe result in improved value to our
customers.
LEASING
We lease tractors and trailers to affiliates and other third parties,
including shippers. Tractor lease terms range from 12 to 60 months and may
include a purchase option. Trailer lease terms range from 1 to 84 months and do
not include a purchase option. We have the largest stainless steel trailer
fleet in North America and derive a portion of our income from leasing these
units to customers and affiliates.
TANK WASH OPERATIONS
To maximize equipment utilization and efficiency we rely on 31 QSI, 1
affiliate-operated QSI, 2 TPI and 14 affiliate-owned tank wash facilities
located throughout our operating network. These facilities allow us to generate
additional tank washing fees from non-affiliated carriers and shippers.
Management believes that the availability of these facilities enables us to
provide an integrated service package to our customers and minimize the risk of
cost escalation associated with reliance on third party tank wash vendors.
INTERMODAL AND BULK RAIL OPERATIONS
We offer a wide range of intermodal services by transporting liquid
bulk containers on specialized chassis to and from a primary mode of
transportation such as rail, barge or vessel. We also provide rail transloading
services that enable products to be transloaded directly from rail car to
trailer. This allows shippers to combine the economy of long-haul rail
transportation with the flexibility of local truck delivery.
OWNER-OPERATOR AND AFFILIATE SERVICES
Through PPI we offer insurance products and other services to both our
internal and external fleet and to our owner-operators at favorable prices. By
offering purchasing programs that take advantage of our significant purchasing
power for products and services such as tractors, fuel and tires as well as
automobile, general liability and workers' compensation insurance, we believe
we strengthen our relationship with our owner-operators and improve driver
recruitment. We also actively market these products and services to other
customers.
LOAD BROKERAGE SERVICES
We provide load brokerage services to enhance our ability to handle
our customers' trucking requirements. To the extent that we do not have the
equipment necessary to service a particular shipment, we will broker the load
to another carrier, thereby meeting the customer's shipping needs and
generating additional revenues for us. Through our relationship with over sixty
independent bulk carriers, we can assure timely response to customer needs.
TRACTORS AND TRAILERS
As of December 31, 2002, we operated a fleet of 7,565 tank trailers.
The majority of these tanks are single compartment, chemical-hauling trailers.
The balance of the fleet is made up of multi-compartment trailers, dry bulk
trailers and special use equipment. The chemical transport units typically have
a capacity between 5,000 to 7,000 gallons and are designed to meet DOT
specifications for transporting hazardous materials. Each trailer is designed
for a useful service life of 15 to 20 years, though this can be greatly
extended through upgrades and modifications.
We acquire new tractors with an initial utilization period of five
years. The useful life of a tractor may be extended if restoration or an
overhaul is performed. As of December 31, 2002, we operated 3,363 tractors, of
which 793 were operated by our drivers, 1,768 were operated by owner-operators,
and 802 were operated by affiliate drivers.
6
Many of our and our affiliate terminals provide preventative
maintenance and receive computer-generated reports that indicate when
inspection and servicing of units are required. Our maintenance facilities are
registered with the DOT and are qualified to perform trailer inspections and
repairs for our fleet and equipment owned by third parties. We also rely on
unaffiliated repair shops for many major repairs. In 2002 we implemented a new
maintenance tracking, invoicing and reporting systems, which is scheduled to be
fully operational at all of our terminals by the end of the second quarter of
2003.
The following table shows the age of trailers and tractors we operated
that were in service as of December 31, 2002. All numbers are approximated as
of such date:
GREATER
LESS THAN THAN
TRAILERS (1) 3 YRS 3-5 YRS 6-10 YRS 11-15 YRS 16-20 YRS 20 YRS TOTAL
- ------------ --------- ------- -------- --------- --------- ------- -----
COMPANY 7 534 1,450 1,383 1,184 1,638 6,196
AFFILIATE 68 322 285 127 116 175 1,093
SHIPPER-OWNED 12 79 58 66 30 31 276
-- --- ----- ----- ----- ----- -----
Total 87 935 1,793 1,576 1,330 1,844 7,565
GREATER
LESS THAN THAN
TRACTORS 3 YRS 3-5 YRS 6-10 YRS 11-15 YRS 15 YRS TOTAL
- -------- --------- ------- -------- --------- ------- -------
COMPANY 160 166 415 18 34 793
AFFILIATE 236 326 196 36 8 802
OWNER-OPERATORS 160 633 793 125 57 1,768
--- ----- ----- --- -- -----
Total 556 1,125 1,404 179 99 3,363
(1) Age based upon original date of manufacture; trailer may be
substantially refurbished or re-manufactured.
MARKETING
We conduct our marketing activities at both the national and local
levels. We employ geographically dispersed sales managers who market our
services primarily to national accounts. These sales managers have extensive
experience in marketing specialized tank truck transportation services. The
corporate sales staff also concentrates on developing dedicated logistics
opportunities. Our senior management is actively involved in the marketing
process, especially in marketing to national accounts. In addition, significant
portions of our marketing activities are conducted locally by our terminal
managers and dispatchers who act as local customer service representatives.
These managers and dispatchers maintain regular contact with shippers and are
well positioned to identify the changing transportation needs of customers in
their respective geographic areas.
CUSTOMERS
Our revenue base consists of customers located throughout North
America, including many Fortune 500 companies such as the Dow Chemical Company,
Procter & Gamble, PPG Industries and E.I. Dupont. As of December 31, 2002 and
2001, approximately 85% of trade accounts receivable were due from companies in
the liquid chemical and bulk food products industries, respectively. During
2002, Dow Chemical accounted for 12.6% of our total revenues. In 2001 and 2000,
Dow Chemical accounted for approximately 12.5% and 7.5% of operating revenue,
respectively. For the fiscal year ended December 31, 2002, our 10 largest
customers accounted for 30.8% of revenues.
ADMINISTRATION
We operate 153 facilities throughout the United States, Canada and
Mexico. Company-owned and affiliate terminals operate as separate profit
centers and terminal managers are responsible and accountable for most
operational decisions. Effective supervision requires maximum personal contact
with customers and drivers. Therefore, to accomplish mutually defined operating
objectives, the functions of customer service, dispatch and general
administration typically rest within each terminal. Cooperation and
coordination is further encouraged by the QCI backhaul policy.
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From the corporate offices in Tampa, FL, management constantly
monitors each terminal's operating and financial performance, safety and
training record, accounts receivable and customer service efforts. Terminal
managers ensure the terminals remain in strict compliance with safety,
maintenance, customer service and other operating procedures. Senior corporate
executives, safety department personnel and audit department personnel conduct
unannounced visits to verify terminal compliance. We strive to achieve uniform
service and safety at all company-owned and affiliate terminals, while
simultaneously affording terminal managers the freedom to focus on generating
business in their region.
COMPETITION
The tank truck business is extremely competitive and fragmented. We
compete primarily with other tank truck carriers and private carriers in
various states and Canada. With respect to certain aspects of our business, we
also compete with intermodal transportation and railroads. Intermodal
transportation has increased in recent years as reductions in train crew size
and the development of new rail technology have reduced costs of intermodal
shipping. In 2001, a major competitor, Matlack Systems, Inc., went bankrupt and
ceased operations.
Competition for the freight transported by us is based primarily on
rates and service. Management believes that we enjoy significant competitive
advantages over other tank truck carriers because of our low fixed cost
structure, overall fleet size, national terminal network and tank wash
facilities.
Our largest competitors are Trimac Transportation Services Ltd.,
Schneider National, Inc. and Superior Carriers, Inc; however, there are many
other smaller recognized tank truck carriers, most of whom are primarily
regional operators.
We also compete with other motor carriers for the services of our
drivers and owner-operators. Our overall size and our reputation for good
relations with affiliates and owner-operators have enabled us to attract a
sufficient number of qualified professional drivers and owner-operators.
Competition from non-trucking modes of transportation and from
intermodal transportation would likely increase if state or federal fuel taxes
were to increase without a corresponding increase in taxes imposed upon other
modes of transportation.
RISK MANAGEMENT AND INSURANCE/SAFETY
The primary insurable risks associated with our business are bodily
injury and property damage, workers' compensation claims and cargo loss and
damage. We maintain insurance against these risks and are subject to liability
as a self-insurer to the extent of the deductible under each policy. We
currently maintain liability insurance for bodily injury and property damage
in the amount of $55 million per incident, with a $5 million per incident
deductible. There is no aggregate limit on this coverage.
We currently maintain a $1 million per incident deductible for
workers' compensation insurance coverage. We are insured over our deductible up
to the statutory requirement by state. We are self-insured for damage or loss
to the equipment we own or lease, and for cargo losses.
We employ a safety and insurance staff of 18 professionals. In
addition, we employ specialists to perform compliance checks and conduct safety
tests throughout our operations. We conduct a number of safety programs
designed to promote compliance with rules and regulations and to reduce
accidents and cargo claims. These programs include training programs, driver
recognition programs, safety awards, an ongoing Substance Abuse Prevention
Program, driver safety meetings, distribution of safety bulletins to drivers
and participation in national safety associations.
ENVIRONMENTAL MATTERS
Our activities involve the handling, transportation, storage and
disposal of bulk liquid chemicals, many of which are classified as hazardous
materials, hazardous substances, or hazardous waste. Our tank wash and terminal
operations engage in the storage or discharge of wastewater and storm-water
that may have contained hazardous
8
substances, and from time to time we store diesel fuel and other petroleum
products at our terminals. As such, we are subject to environmental, health and
safety laws and regulation by U.S. federal, state, local and Canadian
government authorities. Environmental laws and regulations are complex, change
frequently and have tended to become more stringent over time. There can be no
assurance that violations of such laws or regulations will not be identified or
occur in the future, or that such laws and regulations will not change in a
manner that could impose material costs to us.
Facility managers are responsible for environmental compliance.
Self-audits conducted by our internal audit staff are required to assess
operations, safety training and procedures, equipment and grounds maintenance,
emergency response capabilities and waste management. We may also contract with
an independent environmental consulting firm that conducts periodic,
unscheduled, compliance assessments which focus on conditions with the
potential to result in releases of hazardous substances or petroleum, and which
also include screening for evidence of past spills or releases. Our
relationship to our affiliates could, under certain circumstances, result in
our incurring liability for environmental contamination attributable to an
affiliate's operations, although we have not incurred any material derivative
liability in the past. Our environmental management program has been extended
to our affiliates. Our staff includes environmental experts who develop
policies and procedures, including periodic audits of our terminals, tank
cleaning facilities, and historical operations, in an effort to avoid
circumstances that could lead to future environmental exposure.
As a handler of hazardous substances, we are potentially subject to
strict, joint and several liability for investigating and rectifying the
consequences of spills and other environmental releases of such substances
either under the Comprehensive Environmental Response Compensation and
Liability Act of 1980, as amended ("CERCLA") and comparable state laws. From
time to time, we have incurred remedial costs and regulatory penalties with
respect to chemical or wastewater spills and releases at our facilities and,
notwithstanding the existence of our environmental management program, we
cannot assure that such obligations will not be incurred in the future, nor
that such liabilities will not result in a material adverse effect on our
financial condition, results of operations or our business reputation. As the
result of environmental studies conducted at our facilities in conjunction with
our environmental management program, we have identified environmental
contamination at certain sites that will require remediation.
We have also been named a potentially responsible party ("PRP"), or
have otherwise been alleged to have some level of responsibility, under CERCLA
or similar state laws for cleanup of off-site locations at which our waste, or
material transported by us, has allegedly been disposed of. We have asserted
defenses to such actions and have not incurred significant liability in the
CERCLA cases settled to date. While we believe that we will not bear any
material liability in any current or future CERCLA matters, there can be no
assurance that we will not in the future incur material liability under CERCLA
or similar laws.
We are currently solely responsible for remediation of the following
two federal Superfund sites:
BRIDGEPORT, NEW JERSEY. During 1991, CLC entered into a Consent Decree
with the EPA filed in the U.S. District Court for the District of New Jersey,
U.S. v. Chemical Leaman Tank Lines, Inc., Civil Action No. 91-2637 (JFG)
(D.N.J.), with respect to its site located in Bridgeport, New Jersey, requiring
CLC to remediate groundwater contamination. The Consent Decree required CLC to
undertake Remedial Design and Remedial Action ("RD/RA") related to the
groundwater operable unit of the cleanup. A groundwater remedy design has
subsequently been approved by the EPA and is under consideration.
In August 1994, the EPA issued a Record of Decision, selecting a remedy
for the wetlands operable unit at the Bridgeport site at a cost estimated by the
EPA to be approximately $7 million. In October 1998, the EPA issued an
administrative order that requires CLC to implement the EPA's wetlands remedy. A
remedial design for this remedy is currently under consideration by EPA and the
State of New Jersey. In April 1998, the federal and state natural resource
damages trustees indicated their intention to bring claims against CLC for
natural resource damages at the Bridgeport site. CLC finalized a consent decree
on March 16, 2001 with the state and federal trustees and has resolved the
natural resource damages claims. In addition, the EPA has investigated
contamination in site soils. No decision has been made as to the extent of soil
remediation to be required, if any.
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CLC initiated litigation against its insurers to recover its costs in
connection with environmental cleanups at its sites. In a case captioned
Chemical Leaman Tank Lines, Inc. v. Aetna Casualty & Surety Co., et al., Civil
Action No. 89-1543 (SSB) (D.N.J.), Chemical Leaman sought from its insurers
reimbursement of substantially all past and future environmental cleanup costs
at the Bridgeport site. In a case captioned The Aetna Casualty and Surety
Company v. Chemical Leaman Tank Lines, Inc., et al., Civil Action No.
94-CV-6133 (E.D. Pa.), Chemical Leaman sought from its insurers reimbursement
of substantially all past and future environmental cleanup costs at its other
sites. In an agreement dated as of November 18, 1999, Chemical Leaman favorably
resolved these outstanding insurance claims for $33.0 million. We received
$21.5 million of the settlement proceeds in late 1999 and the balance in early
2000.
WEST CALN TOWNSHIP, PA. The EPA has alleged that CLC disposed of
hazardous materials at the William Dick Lagoons Superfund Site in West Caln,
Pennsylvania. On October 10, 1995, CLC entered into a Consent Decree with the
EPA which required CLC to:
- pay the EPA for installation of an alternate water line to
provide water to area residents;
- perform an interim groundwater remedy at the site; and
- conduct soil remediation. US v. Chemical Leaman Tank Lines,
Inc., Civil Action No. 95-CV-4264 (RJB) (E.D. Pa.).
CLC has paid all costs associated with installation of the waterline.
CLC has completed a groundwater study, and has submitted designs for a
groundwater treatment plant to pump and treat groundwater. The EPA anticipates
that CLC will conduct the groundwater remedy over the course of five years, at
which time the EPA will evaluate groundwater conditions and determine whether
further groundwater remedy is necessary. Field sampling for soil remediation
and activities for the design of a soil remediation system have been completed.
Soil remediation will include the use of both a low temperature thermal
treatment unit and a soil vapor extraction system. The Consent Decree does not
cover the final groundwater remedy or other site remedies or claims, if any,
for natural resource damages.
OTHER ENVIRONMENTAL MATTERS. CLC has been named as PRP under CERCLA
and similar state laws at approximately 35 former waste treatment and/or
disposal sites including the Helen Kramer Landfill Site where CLC previously
settled its liability. In general, CLC is among several PRP's named at these
sites. CLC is also named as co-defendant in two civil toxic tort claims arising
from alleged exposure to hazardous substances that were allegedly transported
to disposal sites by CLC and other co-defendants. CLC is also incurring
expenses resulting from the investigation and/or remediation of certain current
and former CLC properties, including its facility in Tonawanda, New York and
its former facility in Putnam County, West Virginia, and its facility in
Charleston, West Virginia. As a result of our acquisition of CLC, we identified
other owned or formerly owned properties that may require investigation and/or
remediation, including properties subject to the New Jersey Industrial Sites
Recovery Act (ISRA). CLC's involvement at some of the above referenced sites
could amount to material liabilities, and there can be no assurance that costs
associated with these sites, individually or in the aggregate, will not be
material. We currently have reserves in the amount of $33.0 million for
liabilities associated with the Helen Kramer Landfill, CLC's facility at
Tonawanda, New York and CLC's former facility in Putnam County, West Virginia
and the other matters discussed above.
REGULATION
As a motor carrier, we are subject to regulation. There are additional
regulations specifically relating to the tank truck industry, including testing
and specifications of equipment and product handling requirements. We may
transport most types of freight to and from any point in the United States over
any route selected by us. The trucking industry is subject to possible
regulatory and legislative changes that may affect the economics of the
industry by requiring changes in operating practices or by changing the demand
for common or contract carrier services or the cost of providing truckload
services. Some of these possible changes may include increasingly stringent
environmental regulations, changes in the hours-of-service regulations which
govern the amount of time a driver
10
may drive in any specific period of time, onboard black box recorder devices or
limits on vehicle weight and size. In addition, our tank wash facilities are
subject to stringent local, state and federal environmental regulations.
The Federal Motor Carrier Act of 1980 served to increase competition
among motor carriers and limit the level of regulation in the industry. The
Federal Motor Carrier Act also enabled applicants to obtain Interstate Commerce
Commission ("ICC") operating authority more readily and allowed interstate motor
carriers such as ourselves greater freedom to change their rates each year
without ICC approval. The law also removed many route and commodity restrictions
on the transportation of freight. A series of federal acts, including the
Negotiated Rates Act of 1993, the Trucking Industry Regulatory Reform Act of
1994 and the ICC Termination Act of 1995, further reduced regulation applicable
to interstate operations of motor carriers such as ourselves, and resulted in
transfer of interstate motor carrier registration responsibility to the Federal
Highway Administration of the DOT. On February 13, 1998, the Federal Highway
Administration published proposed new rules governing registration to operate by
interstate motor carriers. To this point in time adopted changes have not
adversely affected interstate motor carrier operations. During 1999, the Federal
Motor Carrier Safety Improvement Act of 1999 took effect establishing the
Federal Motor Carrier Safety Administration effective January 1, 2000. This
agency's principal assignment is to regulate and maintain safety within the
ranks of motor carriers.
Interstate motor carrier operations are subject to safety requirements
prescribed by the DOT. To a large degree, intrastate motor carrier operations
are subject to safety and hazardous material transportation regulations that
mirror federal regulations. Such matters as weight and dimension of equipment
are also subject to federal and state regulations. DOT regulations mandate drug
testing of drivers. To date, the DOT's national commercial driver's license and
drug testing requirements have not adversely affected the availability of
qualified drivers to us. Alcohol testing rules were adopted by the DOT in
February 1994 and became effective in January 1995 for employers with 50 or
more drivers. These rules require certain tests for alcohol levels in drivers
and other safety personnel. These rules have not adversely affected the
availability of qualified drivers.
Title VI of The Federal Aviation Administration Authorization Act of
1994, which became effective on January 1, 1995, largely deregulated intrastate
transportation by motor carriers. This Act generally prohibits individual
states, political subdivisions thereof and combinations of states from
regulating price, entry, routes or service levels of most motor carriers.
However, the states retained the right to continue to require certification of
carriers, based upon two primary fitness criteria--safety and insurance--and
retained certain other limited regulatory rights. Prior to January 1, 1995, we
held intra-state authority in several states. Since that date, we have either
been "grandfathered in" or have obtained the necessary certification to
continue to operate in those states. In states in which we were not previously
authorized to operate intra-state, we have obtained certificates or permits
allowing us to operate.
From time to time, various legislative proposals are introduced
including proposals to increase federal, state, or local taxes, including taxes
on motor fuels. We cannot predict whether, or in what form, any increase in
such taxes applicable to us will be enacted.
SEASONALITY
Our business is subject to limited seasonality, with revenues
generally declining slightly during winter months, namely the first and fourth
fiscal quarters, and over holidays. Highway transportation can be adversely
affected depending upon the severity of the weather in various sections of the
country during the winter months. Our operating expenses also have been
somewhat higher in the winter months, due primarily to decreased fuel
efficiency, increased utility costs and increased maintenance costs of revenue
equipment in colder months.
ITEM 2. PROPERTIES
As of December 31, 2002, QDI's operating facilities were located in
the following cities:
QCI OPERATED QSI TPI AFFILIATE OPERATED
Albany, NY ** Albany, NY ** Chicago, IL ** Augusta, GA **
Appleton, WI Atlanta, GA ** Columbus, OH Baltimore, MD
Atlanta, GA ** Augusta, GA ** East Rutherford, NJ ** Barberton, OH **
11
Augusta, GA ** Barberton, OH ** Essexville, MI ** Baton Rouge, LA
Becancour, CDN Baton Rouge, LA Greer, SC Beaumont, TX
Bessemer, AL Branford, CT ** Kalamazoo, MI Bridgeport, NJ **
Branford, CT ** Bridgeport, NJ ** Laredo, TX Bristol, PA
Brunswick, GA E. Channelview, TX Montreal, Canada Bristol, WI
Calvert City, KY W. Channelview, TX*** North Haven, CT Chattanooga, TN **
Carteret, NJ Charleston, SC Palmer, MA ** Chattanooga, TN **
Castleton, VT Charleston, WV Port Arthur, TX ** Cincinnati, OH
Channelview, TX Chattanooga, TN ** Saddle Brook, NJ Cincinnati, OH **
N. Charleston, SC ** Freeport, TX Sarnia, Canada Danville, IL
Charleston, SC ** Friendly, WV ** South Point, OH Delaware, OH **
Chester, SC ** Geismer, LA Dumfries, VA
Columbus, OH Houston, TX ** Ft. Worth, TX **
Coteau du Lac, QUE ** Kalamazoo, MI ** Freeport, TX
E. St. Louis, IL Kent, WA ** Gary, IN **
Fall River, MA Lansing, IL Glennmoore, PA
Follansbee, WV Midland, MI ** Grimes, IA
Fort Worth, TX Newark, NJ ** Hagerstown, MD
Geismer, LA Pocatello, ID ** Houston, TX **
Geneva, NY Rahway, NJ Jacksonville, FL
Greenup, KY Rock Hill, SC ** Joliet, IL
Kalamazoo, MI ** Salt Lake City, UT ** Kansas City, MO
Kelso, WA San Pablo, CA ** Kent, WA
Kent, WA ** Sarnia, ON Lake Charles, LA
Ludington, MI ** Savannah, GA Lansing, IL
Mexico South Gate, CA Lima, OH
Midland, MI ** Spartanburg, SC ** Louisville, KY
Montreal Canada ** Sulphur, LA Luling, LA
Newark, NJ ** Wilmington, NC ** Mediapolis, IA
Oakville, ON Memphis, TN
Orlando, FL Memphis, TN
Pointe aux Trembles, PQ Memphis, TN
Pocatello, ID ** Mobile, AL
Richmond, CA Modesto, CA
Salt Lake City, UT ** Morgantown, WV **
South Gate, CA Nazareth, PA
St. Louis, MO New Castle, DE
Summit, IL New Castle, DE
Tonawanda, NY ** Niagara Falls, NY
Waterford, NY Norfolk, VA
Wilmington, NC ** Owensboro, KY
Parker, PA **
Pasadena, TX
Pearsburg, VA
Portland, OR
Roanoke, VA
Salisbury, NC
St. Gabriel, LA **
Savannah, GA
South Point, OH
Southern Cal., CA
Spartenburg, SC **
St. Albans, WV **
Tampa, FL
Thorofare, NJ
Toledo, OH
Triadelphia, WV
Tucker, GA
Warsaw, IN
Williamsport, PA **
** Indicates the terminal is owned by the Company.
*** QSI facility operated by affiliate as of November, 2002
12
In addition to the properties listed above, we also own property in
Croydon, PA, Syracuse, NY, and Hartford, WI. Our executive and administrative
offices are located in Tampa, Florida.
Item 3. LEGAL PROCEEDINGS
In addition to those items disclosed under Item 1. "Business -
Environmental Matters," we are from time to time involved in routine litigation
incidental to the conduct of our business. We believe that no litigation
currently pending against us, if adversely determined, would have a material
adverse effect on our consolidated financial position, results of operations or
cash flows.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of our security holders during
the fourth quarter of the year covered by this report.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for our membership units
common equity. As of December 31, 2002, all membership units of the Company
were owned by QDI Inc. No distribution with respect to the membership interests
of the Company has ever been paid. Future payments of distributions, if any,
are limited by contractual restrictions in the Company's financing agreements.
For further information regarding these contractual restrictions, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
At December 31, 2002, the Company had no compensation plans (or
individual compensation arrangements) pursuant to which its membership
interests were authorized for issuance.
On May 30, 2002, the Company issued $54.5 million aggregate principal
amount of its 12-1/2% Senior Subordinated Secured Notes due 2008 (the "New
Notes") as part of the exchange offer and consent solicitation by QDI Inc. and
its subsidiaries. The Company issued the New Notes to holders of $83.9 million
principal amount of QDI Inc.'s outstanding 10% Series B Senior Subordinated
Notes due 2006 and Series B Floating Interest Rate Subordinated Term Securities
due 2006 (FIRSTS) (together, the "QDI Notes") that participated in the exchange
offer and consent solicitation. The Company did not receive any cash proceeds
as a result of the issuance of the New Notes in the May 30, 2002 transaction.
For further information regarding the May 30, 2002 exchange offer transaction,
see "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" and Note 8 to our
audited consolidated financial statements included at Item 8 of this report.
The Company believes that the issuance of the New Notes in the May 30, 2002
transaction was exempt from the registration requirements of the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereof or Regulation D
thereunder because this issuance did not involve a public offering or sale. No
underwriters, brokers or finders were involved in this transaction.
Item 6. SELECTED FINANCIAL DATA
The selected historical consolidated financial information set forth
below is qualified in its entirety by reference to, and should be read in
conjunction with, our Consolidated Financial Statements and notes thereto
included elsewhere in this report and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The consolidated income statement and balance sheet information set
forth below for and as of each of the years in the five-year period ended
December 31, 2002 have been derived from our audited consolidated financial
statements.
13
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1998 1999 2000 2001 2002
(RESTATED)(3)
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA
Operating revenues $ 381,388 $ 569,597 $ 556,547 $ 510,701 $ 516,538
--------- --------- --------- --------- ---------
Costs and expenses:
Operating expenses, excluding
depreciation and amortization 330,285 491,662 491,672 448,972 457,432
Option expense 14,678
Depreciation and amortization 29,402 60,556 35,281 33,410 31,823
Interest expense, net 19,791 40,452 40,236 40,224 33,132
Transaction fees -- -- -- -- 10,077
Other expenses (income) (164) (134) (24) 22 126
--------- --------- --------- --------- ---------
Total costs and expenses 393,992 592,536 567,165 522,628 532,590
--------- --------- --------- --------- ---------
(Loss) before taxes (12,604) (22,932) (10,618) (11,927) (16,052)
Provision (benefit) for income taxes (4,201) (6,061) 31,225 1,135 1,443
Minority interest (74) (21) -- -- --
--------- --------- --------- --------- ---------
Income (Loss) from continuing
operations, before extraordinary
item (8,477) (16,892) (41,843) (13,062) (17,495)
Income (Loss) from discontinued
operations, net 1,389 1,462 56 (359) (2,913)
--------- -------- -------- -------- --------
(Loss) before extraordinary
item (7,088) (15,430) (41,787) (13,421) (20,408)
Extraordinary item (1) (3,077) -- -- -- --
--------- -------- -------- -------- --------
Loss before cumulative effect of
a change in accounting principle (10,165) (15,430) (41,787) (13,421) (20,408)
Cumulative effect of a change in
accounting principle (2) -- -- -- -- (23,985)
--------- --------- --------- --------- ---------
Net loss $ (10,165) $ (15,430) $ (41,787) $ (13,421) $ (44,393)
========= ========= ========= ========= =========
OTHER DATA
Net cash and cash equivalents
provided by operating activities $ 16,596 $ 9,169 $ 41,282 $ 7,468 $ 25,832
Net cash and cash equivalents used
in investing activities (289,275) (8,875) (18,721) (34,936) (7,169)
Net cash and cash equivalents (used
in) provided by financing activities 271,413 674 (20,171) 27,263 (19,998)
Capital expenditures 29,765 25,727 23,079 37,412 15,286
Number of terminals at end of Period 194 171 152 148 153
Number of trailers operated at
end of period 8,003 7,625 7,526 7,737 7,565
Number of tractors operated at
end of period 3,679 3,943 3,491 3,394 3,363
BALANCE SHEET DATA AT PERIOD END:
Total assets $ 583,246 $ 542,241 $ 453,073 $ 448,138 $ 387,265
Total indebtedness, including
current maturities 441,331 434,156 416,939 443,856 382,190
Redeemable securities 17,204 13,287 15,092 17,709 --
Membership interest (6) (48,320) (64,773) (110,866) (135,427) (112,876)
QDI INC. BALANCE SHEET DATA AT
DECEMBER 31, 2002
Total assets 387,265
Long-term indebtedness, including
current maturities (4) 397,613
Redeemable securities (5) 57,660
Stockholders' deficit (134,696)
(1) We incurred such extraordinary item in respect of an early debt
extinguishment.
(2) Adoption of FAS Statement 142 resulted in an impairment loss related
to goodwill.
14
(3) See Note 1 of Notes to Consolidated Financial Statements.
(4) Long-term indebtedness of QDI Inc. on a consolidated basis consists of
our long-term indebtedness and $15.4 million aggregate principal amount
of 12% junior subordinated paid-in-kind notes issued by QDI Inc.,
including note carrying value in excess of face value of $2.0 million.
(5) Redeemable securities of QDI Inc. on a consolidated basis consists of
$56.5 million of 13.75% mandatorily redeemable preferred stock and $1.2
million of mandatorily redeemable common stock issued by QDI Inc.
(6) Membership interest at December 31, 2002 reflects as a capital
contribution to us the value of the securities issued by QDI Inc. to
the holders of the QDI notes participating in the transactions and the
$10.0 million cash proceeds received by QDI Inc. in exchange for its
13.75% mandatorily redeemable preferred stock issued to Apollo.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our results of operations and financial
condition should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this report.
OVERVIEW
Our revenue is principally a function of the volume of shipments by
the bulk chemical industry, our market share as opposed to that of our
competitors and the amount spent on tank truck transportation as opposed to
other modes of transportation, such as rail. The volume of shipments of
chemical products are in turn affected by many other industries, including
consumer and industrial products, automotive, paint and coatings, and paper,
and tend to vary with changing economic conditions. Additionally we also
provide leasing, tank cleaning, insurance products for drivers and affiliates,
and inter-modal services which are presented as other revenue.
The principal components of our operating costs include purchased
transportation, salaries, wages, benefits, tractor and trailer maintenance
costs, insurance, technology infrastructure and fuel costs. We believe our use
of affiliates and owner-operators provides a more flexible cost structure,
increases our asset utilization and increases our return on invested capital.
We have historically focused on maximizing cash flow and return on
invested capital. Our affiliate program has greatly reduced the amount of
capital needed for us to maintain and grow our terminal network. In addition,
the
15
extensive use of owner-operators reduces the amount of capital needed to
operate our fleet of tractors, which have shorter economic lives than trailers.
These factors have allowed us to concentrate our capital spending on our
trailer fleet where we can achieve superior returns on invested capital through
our transportation operations and leasing to third parties and affiliates.
Through several strategic asset purchases during the latter half of
2001, we were further able to expand our service capabilities and our
geographic coverage. We intend to continue providing these core services and
expand upon existing customer relationships by providing our supplementary
services as well as increasing the fleet size in these markets.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with United States generally accepted accounting
principles ("GAAP"). We believe the following are the more critical accounting
policies that impact the financial statements, some of which are based on
management's best estimates available at the time of preparation. Actual future
experience may differ from these estimates.
Environmental liabilities - We have reserved for potential
environmental liabilities based on the best estimates of potential clean-up and
remediation estimates for known environmental sites. We employ a staff of
environmental experts to administer all phases of our environmental programs,
and use outside experts where needed. These professionals develop estimates of
potential liabilities at these sites based on projected and known remediation
costs. This analysis requires us to make significant estimates, and changes in
facts and circumstances could result in material changes in the environmental
accrual.
Accident claims reserves - We carry insurance for auto liability
claims, with a $5 million per occurrence deductible as of September 15, 2002,
and worker's compensation with a $1 million per accident deductible. For cargo
claims, we are self-insured. In developing liability reserves, we rely on
professional third party claims administrators, insurance company estimates and
the judgment of our own safety department personnel. This analysis requires us
to make significant estimates, and changes in facts and circumstances could
result in material changes in the accident claims reserves.
Revenue recognition - Transportation revenues and related costs are
recognized on the date the freight is delivered or the tank wash performed.
Other operating revenues, consisting primarily of lease revenues from
affiliates, independent operators and third parties, are recognized as earned.
Allowance for uncollectible receivables - The allowance for all
potentially uncollectible receivables is based on a combination of historical
data, cash payment trends, specific customer issues, write-off trends, general
economic conditions and other factors. These factors are continuously monitored
by management to arrive at the estimate for the amount of accounts receivable
that may be ultimately uncollectible. The receivables analyzed include trade
receivables, as well as loans and advances made to owner-operators and
affiliates. This analysis requires us to make significant estimates, and
changes in facts and circumstances and the economic environment could result in
material changes in the allowance for uncollectible receivables.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, we adopted the provisions of Financial
Accounting Standards No 142, "Goodwill and Other Intangible Assets" (Statement
142). As a result of the adoption of Statement 142, the amortization of
goodwill ceased, resulting in a decrease in the net loss of $3.9 million for
the year ended December 31, 2002. Under Statement 142, goodwill is subject to
an annual impairment test. We completed our initial impairment test during
2002. During our initial impairment analysis of goodwill, we determined that
approximately $4.6 million of goodwill had been classified as an offset against
accounts payable and accrued expenses. These amounts have been reclassified
into goodwill during 2002. As a result of our initial impairment test, an
impairment adjustment of $24.0 million was charged to earnings as a cumulative
effect of a change in accounting principle at January 1, 2002. There were
several factors that led to the conclusion that an impairment charge was
warranted. These factors included several consecutive years of declining base
business revenues and operating losses, an uncertain economic
16
environment exacerbated by the events of September 11, 2001, increased
insurance costs for the foreseeable future and the highly leveraged nature of
the Company. No tax benefit was recorded in connection with this charge. The
fair value was determined based on a combination of prices of comparable
businesses and present value techniques.
In July 2001, the FASB issued SFAS 143 Accounting for Asset Retirement
Obligations, which requires that companies recognize a liability for retirement
obligations of long-lived assets in the period the liability occurs. This
pronouncement is effective for fiscal years beginning after September 15, 2002.
We do not anticipate any significant impact on our financial results from
adoption of this standard.
In August 2001, the Financial Accounting Standards Board issued SFAS
144 Accounting for the Impairment or Disposal of Long-Lived Assets, which
supersedes SFAS 121. We currently assess whether there has been impairment of
long-lived assets and certain intangibles in accordance with SFAS 121 and have
continued to do so under the guidance provided by SFAS 144 in 2002
In September 2002, the FASB issued SFAS 146 Accounting for Costs
Associated with Exit or Disposal Activities. This pronouncement addresses
financial accounting and reporting for costs associated with exit or disposal
activities not covered under SFAS 144 and also supercedes EITF 94-3. This
pronouncement is effective for activities initiated after December 31, 2002. We
do not anticipate any significant impact on our financial results from adoption
of this standard.
In November 2002, the FASB issued FASB Interpretation ("FIN") 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantee of Indebtedness of Others. FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. FIN 45's provisions
for initial recognition and measurement should be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. The guarantor's
previous application may not be revised or restated to reflect the effect of
the recognition and measurement provisions of the interpretation. The
disclosure requirements are effective for financial statements of both interim
and annual periods that end after December 15, 2002. We are not a
guarantor under any significant guarantees and thus this interpretation is not
expected to have a significant effect on our financial position or
results of operations.
On December 31, 2002, the FASB issued FAS No. 148, Accounting for
Stock-based Compensation--Transition and Disclosure--an amendment of FAS 123,
Accounting For Stock-Based Compensation. FAS 148 does not change the provisions
of FAS 123 that permit entities to continue to apply the intrinsic value method
of APB 25, Accounting for Stock Issued to Employees. FAS 148 does require
certain new disclosures in both annual and interim financial statements. The
required annual disclosures were effective immediately for us. The new
interim disclosure provisions will be effective for us in the first
calendar quarter of 2003.
On January 17, 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities, An Interpretation of Accounting Research Bulletin No. 51.
The primary objectives of FIN 46 are to provide guidance on how to identify
entities for which control is achieved through means other than through voting
rights (variable interest entities "VIE" and how to determine when and which
business enterprise should consolidate the VIE. This new model for
consolidation applies to an entity in which either (1) the equity investors do
not have a controlling financial interest on (2) the equity investment at risk
is insufficient to finance that entity's activities without receiving
additional subordinated financial support from other parties. We do
not expect the adoption of this standard to have any impact on the financial
position and results of operations.
RESULTS OF OPERATIONS
During the second quarter of 2002, the Company sold the Levy petroleum
division and closed the Levy mining operation, as well as closed Bulknet, our
internet-based load brokerage subsidiary. Revenue and operating expenses in the
following discussion have been adjusted to remove the revenues and expenses
associated with the operations of these divisions.
The consolidated financial statements as of and for the year ended
December 31, 2001 have been restated to reflect the correction of a clerical
error and establish a reserve for incurred but not reported insurance losses
relating to a subsidiary that markets insurance products. This correction
resulted in a decrease in net income of approximately $1 million. All financial
data in this section has been restated to reflect the correction of the error.
In addition, we reclassified our insurance subsidiary's premium revenue
and insurance loss expenses to a gross basis versus a net basis for 2000 and
2001. The impact of those reclassifications increased both other revenue and
insurance claims expense by $3.1 million and $2.4 million for 2000 and 2001,
respectively.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
17
The chemical industry overall remained weak for most of 2002,
continuing a decline that started in the third quarter of 2000. Total revenues
for 2002 were $516.5 million, an increase of $5.8 million or 1.1% compared to
2001 revenues. Transportation revenue increased by $3.1 million or .7% compared
to 2001. The increase in transportation revenue is partially attributable to
business acquired through strategic asset purchases in the last half of 2001
that was retained throughout 2002 ($7.3 million), offset by lower fuel
surcharge for the year ($4.5 million). New business gains and insurance
surcharge revenue accounted for $0.3 million of the net revenue increase in
2002. Non-trucking revenue increased by $2.8 million or 4.2% in 2002 versus
2001 primarily due to acquisitions during 2002 and the second half of 2001 by
QSI, our tank-wash subsidiary.
We operated 153 terminals at December 31, 2002 compared to 148
terminals at December 31, 2001. The increase is the result of strategic new
affiliate terminals opened in 2002, and new transload operations, offset by
further consolidation and rationalization of terminals from cost cutting
measures in response to decreased demand.
We operated a total of 7,565 trailers and 3,363 tractors at the end of
2002 compared to 7,737 trailers and 3,394 tractors for year ended December 31,
2001. The decline in tractors, many of which are owned by owner-operators, is
largely due to the sale of older equipment, and disposal of the Canadian
petroleum division, partially offset by new tractor purchases in the fourth
quarter of 2002. The decrease in trailers is due to better equipment
utilization allowing for the disposals of older equipment, plus the disposal of
our Levy petroleum division.
Operating expenses, excluding depreciation and amortization, totaled
$457.4 million in 2002, an increase of $8.4 million or 1.9% from 2001. The
increase in operating expenses was primarily attributable to higher purchased
transportation, driver compensation and insurance costs. Purchased
transportation increased $3.2 million as a result of the addition of several new
affiliate operations added in 2002. Driver wages and benefits increased by $2.1
million due primarily to escalating group health costs and workers compensation
premiums. Also significantly contributing to the operating expense increase was
insurance claims expense, which increased $1.7 million or 14.3% versus 2001.
These costs were negatively impacted by higher premiums due to a tight insurance
market, which was exacerbated by the events of September 11, 2001. Fuel expense
for company operations was $0.2 million lower in 2002 reflecting overall lower
annual fuel cost and conversions to affiliate locations. Additionally,
selling and administrative expense in 2002 includes a $6.4 million charge to
increase the reserve for uncollectible accounts, due to increased collection
efforts on trade receivables and receivables from terminated owner-operators
and affiliates. Selling and administrative cost also include a benefit from a
$6.0 million reduction in environmental liabilities reflecting lower than
anticipated environmental clean-up costs. Selling and administrative expenses
increased by $0.5 million as a result of our initiation of an aggressive
campaign on both driver retention and recruiting. Additionally, in 2002 we
increased our credit and collection staffing in an effort to improve cash flow
and decrease our days sales outstanding (DSO).
Our operating expenses have been impacted by several charges in both
2002 and 2001. We have incurred severance, benefits and other related expenses
from cost cutting measures and consolidating terminals that resulted in charges
of $1.8 million and $1.0 million in 2002 and 2001, respectively. In addition we
had charges related to the prior operations of CLC of $2.3 million and $2.4
million in 2002 and 2001, respectively, related to insurance claims associated
with the operations of predecessor companies incurred prior to the merger in
1998.
Depreciation and amortization totaled $31.8 million for 2002 versus
$33.4 million in 2001. The decrease is attributable to the implementation of FAS
142 in 2002 which eliminated the amortization of goodwill ($3.9 million) and to
tractor and trailer equipment acquired at the time of the merger with CLC that
became fully depreciated in 2002. These decreases were partially offset by
depreciation related to higher capital spending on computer related
infrastructure and acquisitions of equipment in 2002 and the end of 2001.
Total operating expenses, including depreciation and amortization as a
percentage of revenue, the "operating ratio," increased to 94.7% in 2002 versus
94.5% in 2001. Excluding the charges and restructuring mentioned above, our
operating ratio would have increased to 93.9% versus 93.8% in 2001, due largely
to the increases in insurance and benefit costs.
Interest expense was $33.1 million in 2002 versus $40.2 million during
2001. The reduction in interest expense was the result of an exchange offer
consummated during the second quarter of 2002 which reduced our overall level
of indebtedness. For a discussion of the Exchange Offer, see note 8 to the
consolidated financial
18
statements included elsewhere in this document. In connection with the Exchange
Offer, we recorded $10.1 million in transaction fees, including the write-off
of existing unamortized fees from prior credit amendments.
Discontinued operations accounted for a $1.4 million loss and $0.4
million loss in 2002 and 2001 respectively. The discontinued operations
consisted of the sale and disposal of the Canadian petroleum and mining
divisions of Levy, and the closure of Bulknet, our internet-based load brokerage
subsidiary. We incurred a $1.6 million loss on the ultimate disposition of the
operations, due largely to the write-off of goodwill, sale of assets associated
with the Canadian petroleum and mining division and write down of all software
and development costs at Bulknet.
During 2002 there was a change in accounting principle to recognize
the impairment of goodwill relating to implementation of FAS 142 of $24.0
million. See note 3 to the consolidated financial statements for further
discussion.
Income tax expense for 2002 was $1.4 million versus $1.1 million for
2001.
Our net loss after discontinued operations was $44.3 million for 2002
versus $13.4 million for 2001 for the reasons outlined above.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues for 2001 were $510.7 million, a decrease of $45.8 million or
8.2% compared to 2000 revenues. The revenue decline was largely attributable to
the sustained weak industrial production demand that began in the third quarter
of 2000 and has continued dropping throughout 2001. This decline in demand for
bulk transportation services was due to the overall slowing economic
conditions, downsizing and consolidation in the U.S. chemical industry, and
increased competition from other forms of transportation such as rail. This
environment has also intensified pricing competition in the bulk transportation
industry. In addition, the terrorist attack on the World Trade Center and other
locations on September 11, 2001, pushed overall demand lower in the fourth
quarter of 2001. The revenue decline was mitigated by new business of $36
million and business acquired through strategic asset purchases in 2001 of $8.7
million. The 2000 results include $15.7 million of fuel surcharge versus $11.9
million in 2001. This decline reflects both overall volume decreases and the
drop in fuel prices towards the end of 2001. We instituted an insurance
surcharge in October 2001 in response to dramatically rising insurance costs.
We operated 148 terminals at December 31,2001 compared to 152
terminals at December 31, 2000. The reduction is the result of further
consolidation and rationalization of terminals from cost cutting measures in
response to demand, offset by strategic new terminals acquired in 2001.
We operated a total of 7,737 trailers and 3,394 tractors at the end of
2001 compared to 7,526 trailers and 3,491 tractors for year ended December 31,
2000. The decline in tractors, many of which are owned by owner-operators, is
largely due to lower demand, offset by new tractor purchases in 2001. The
increase in trailers is due to several strategic asset purchases made in 2001,
offset by disposals of older equipment.
Operating expenses, excluding depreciation and amortization, totaled
$449.0 million in 2001, a decrease of $42.7 million or 8.7% from 2000. This
decrease in operating expenses was largely due to the lower shipment volume in
2001 that resulted in lower purchased transportation, compensation and other
operating costs due to personnel reductions and cost control. In addition, in
2001 we converted several less profitable terminals to affiliate operations.
Together, these factors resulted in reducing our driver wages ($1.0 million)
and reducing purchased transportation expense for owner-operators ($29.0
million). These decreases were offset by net increases in purchased
transportation for affiliates ($6.6 million) due to the conversions and the
pass through payments of fuel surcharge.
Cost cutting initiatives, volume related declines and the conversion
of our terminals to affiliate operations reduced overall compensation and
benefit expense in 2001 compared to 2000 by ($6.0 million, or 8.3%), as well as
selling and administrative costs ($3.8 million, or 21.8%). Fuel, supplies and
maintenance decreased $4.0 million in 2001. This decrease was largely the
result of ($1.0 million) decrease in our fuel expense due to fuel prices
dropping during the second half of the year, plus demand declines. Other volume
related operating expenses declined,
19
including declines in tank wash expense of ($1.8 million) and equipment
maintenance and other expenses ($1.2 million). Insurance and claims increased
($0.5 million) as a result of new vehicle and workers compensation insurance
policies starting in the third quarter of 2001. These higher insurance costs
reflect the current unfavorable insurance market for the trucking industry. We
were able to recoup a portion of these increased costs through implementation
of an insurance surcharge.
Our operating expenses have been impacted by several charges in both
2001 and 2000. We have incurred severance, benefits and other related expenses
from cost cutting measures and consolidating terminals that resulted in charges
of $1.0 million and $3.2 million in 2001 and 2000, respectively. In addition,
we had charges related to the prior operation of CLC of $2.4 million and $6.7
million in 2001 and 2000, respectively. These expenses related primarily to
pre-merger accounts receivable, poor experience on pre-merger insurance claims
and other expenses associated with the operations of the predecessor companies
prior to the merger in 1998. Excluding these charges, operating expenses would
have declined $38.1 million in 2001 versus 2000.
Depreciation and amortization totaled $33.4 million for 2001 versus
$35.3 million in 2000. The decrease is attributable to tractor and trailer
equipment acquired at the time of the merger with CLC that became fully
depreciated in 2001, offset by higher capital spending on computer related
infrastructure and acquisitions of equipment in 2001.
Total operating expenses, including depreciation and amortization, as
a percentage of revenue decreased to 94.5% of revenue in 2001 compared to 94.7%
of revenue in 2000. Excluding the charges and restructuring mentioned above,
the operating ratio would have increased in 2001 to 93.8% versus 92.9% in 2000.
This increase largely relates to the revenue decline in 2001 and the impact on
our fixed costs, along with increases in insurance expense incurred in 2001.
Interest expense remained unchanged at $40.2 million during 2001
compared to 2000. This was the result of lower interest rates on variable term
debt that were offset by losses on interest rate swaps on that debt, and
additional expenses associated with amending the credit agreement and increased
borrowing. Total debt increased in 2001 by $26.9 million primarily to finance
strategic terminal and tank wash assets purchased in several areas of the
country.
Income tax expense for 2001 was $1.1 million versus $31.2 million for
2000. In 2000, we established a $32.6 million valuation allowance on net
deferred tax assets as a result of cumulative losses in recent years.
Our net loss after discontinued operations was $13.4 million for 2001
versus $41.8 million loss in 2000. The decrease in the net loss was due
primarily to the valuation allowance on net deferred tax assets and the charges
in 2000 discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is cash flow from operations and
borrowing availability under our credit agreement. Our revolving credit
agreement becomes due in June of 2004. We generated $41.3 million, $7.5 million
and $25.8 million from operating activities in 2000, 2001 and 2002,
respectively. The increase in cash provided by operating activities in 2002
reflects a decrease in Days Sales Outstanding ("DSO") of accounts receivable
during 2002 largely as a result of our increased collection efforts, and timing
of payments on our self-insured auto claims and accounts and brokers payable. In
2000, we received $11.0 million of insurance proceeds for environmental claims.
Capital expenditures totaled $23.1 million, $37.4 million and $15.3
million in 2000, 2001 and 2002, respectively. As of December 31, 2002, we were
committed to purchase tractors for $2.0 million. In 2001, several major asset
purchases occurred including West Coast terminals and new tank wash facilities
totaling approximately $14.7 million. In 2002, capital was used to complete the
purchase of our new dispatch system and other computer infrastructure, new
tractors and a tank wash facility. Net cash used in investing activities in
2000, 2001 and 2002 was $18.7 million, $34.9 million and $7.2 million,
respectively. In 2002, we recognized proceeds of approximately $4.3 million in
connection with our disposal of the petroleum and mining divisions of Levy.
20
Net cash (used in) or provided by financing activities was ($20.2
million); $27.3 million and ($20.0 million) in 2000, 2001 and 2002,
respectively. The use of cash in 2002 is a result of paying down our revolving
debt and from transaction fees associated with the Exchange Offer. In 2001, we
reached an agreement with a minority interest shareholder to repurchase shares
of CLC preferred stock for the stated value of $2.6 million plus associated
cost. In 2001, we increased our total debt by $26.9 million to finance the
strategic asset purchases described above.
In 1998, our parent QDI Inc. was capitalized with $140.0 million
principal amount of QDI Notes, a $360.0 million credit agreement, $68.0 million
in equity investments by Apollo, other institutional investors and members of
our management and $31.9 million in preferred and common equity investments by
certain of our shareholders, including Apollo. Upon consummation of the CLC
merger, CLC and its subsidiaries became guarantors of the QDI Notes and
guarantors under our credit agreement. Our credit agreement currently provides
for a term-loan facility consisting of a $90.0 million Tranche A Term Loan
maturing on June 9, 2004, a seven-year $105.0 million Tranche B Term Loan
maturing on August 28, 2005, a $90.0 million Tranche C Term Loan maturing on
February 28, 2006, Tranche D Loan of $15 million, maturing on March 2, 2006 and
a $75 million revolving credit facility available until June 9, 2004. The
proceeds from the December 2001 Tranche D Loan were used to pay down $5 million
each on the Tranche A, B and C loans. On December 31, 2002 our total borrowing
under the credit agreement, including current maturities, was $286.7 million
and we had $26.9 million available for borrowings under the revolving credit
facility. At December 31, 2002 a 1 point change in our variable interest
bearing debt would result in an annual $2.9 million change in our interest
expense.
Our credit agreement includes financial covenants which require
certain ratios to be maintained. In 2001, a default, for which we received a
waiver in October 2001, occurred with respect to the financial covenants in the
credit agreement. In addition, during 2001 we separately amended our credit
agreement on June 4, 2001 and on December 14, 2001, to, among other things,
modify our financial covenants.
On April 5, 2002, we entered into a fifth amendment (the "Fifth
Amendment") to our credit agreement. The Fifth Amendment relates to the
financial covenants which were unlikely to be met beginning with the quarter
ending March 31, 2003, and further amended those financial covenants through
the date of the final maturity of our credit agreement in 2005. Such revised
covenants are less restrictive than the previously existing covenants for the
period beginning March 31, 2003 through final maturity of our credit agreement.
The revised financial covenants in the Fifth Amendment consist of the
following:
- - The Company must maintain a ratio of consolidated EBITDA to
consolidated interest expense of at least 1.75:1 for the twelve-month
period ended June 30, 2002. Thereafter, the minimum consolidated
interest coverage ratio we are required to maintain increases in
various amounts until the twelve-month period ending December 31, 2005
when it becomes 2:15:1 for such period.
- - The Company must maintain a ratio of consolidated senior debt to
consolidated EBITDA of no more that 4.80:1 for the twelve-month
period ended June 30, 2002. thereafter, the minimum leverage ratio the
Company is allowed decreases in various amounts until the twelve-month
period ending December 31, 2005, when it becomes 3.50:1.
As of December 31, 2002, the Company was in compliance with the
financial covenants in the credit agreement. However, continued compliance with
these requirements could be effected by changes relating to economic factors,
market uncertainties, or other events as described under "--Forward-Looking
Statements and Certain Considerations." Although there can be no assurance, the
Company currently believes that it will be in compliance with the financial
covenants in the credit agreements through December 31, 2003.
In 2002, QDI Inc. and its subsidiaries, pursuant to the terms of an
Offering Memorandum and Consent Solicitation Statement, dated as of April 10,
2002, as supplemented May 10, 2002 by Supplement No. 1 thereto dated as of May
10, 2002 (as so supplemented, the "Offering Memorandum"):
- commenced an offer to exchange up to $87.0 million principal
amount of QDI Inc.'s outstanding 10% Series B Senior
Subordinated Notes due 2006 and Series B Floating Interest
Rate Subordinated Term
21
Securities due 2006 (FIRSTS) (together, the "QDI Notes") for
a combination of certain debt and equity securities,
including the 12 1/2% Senior Subordinated Secured Notes due
2008 of the Company (the "New Notes");
- commenced a consent solicitation for certain proposed
amendments to the indenture governing the QDI Notes to
eliminate many of the restrictive covenants contained in that
indenture; and
- entered into lock-up agreements with certain affiliates of
Apollo Management, L.P., the Company's controlling
stockholder ("Apollo"), certain affiliates of Ares
Management, L.P. ("Ares") and certain members of QDI Inc.'s
management, who respectively held $29.5 million, $22.5
million and $1.0 million aggregate principal amount of the
QDI Notes.
The exchange offer for the QDI Notes and the consent solicitation were
consummated on May 30, 2002 (the "Exchange Offer"). On such date, QDI Inc.
accepted for exchange $61.4 million aggregate principal amount of the QDI Notes
(excluding the $53.0 million aggregate principal amount of the QDI Notes
covered by the lock-up agreements). All tendering holders received for each
$1,000 principal amount of QDI Notes tendered, a combination of debt and equity
securities consisting of:
- $650 principal amount of the Company's 12 1/2% Senior
Subordinated Secured Notes due 2008 (the "New Notes");
- $150 principal amount of QDI Inc.'s 12% Junior Subordinated
Pay-in-Kind Notes due 2009 (the "QDI Junior PIK Notes" and;
- 2.0415 warrants, each to purchase one share of QDI Inc.'s
common stock at an exercise price of $5 per share.
Pursuant to the terms of the lock-up agreements with Ares, Apollo and
QDI Inc.'s management, on May 30, 2002:
- Ares exchanged its QDI Notes for the same combination of debt
and equity securities indicated above for tendering holders;
- Apollo and QDI Inc.'s management group exchanged their
respective QDI Notes for shares of QDI Inc.'s 13.75%
preferred stock; and
- Apollo purchased for cash an additional $10 million of QDI
Inc.'s 13.75% preferred stock, all of the proceeds of which
were used by QDI to retire certain borrowings under our
credit agreement for which Apollo had provided credit
support.
In connection with the formation of the Company, all equity and
obligations of QDI Inc. were treated as additional paid-in capital of the
Company.
As a result of the transactions, on May 30, 2002, the Company issued
$54.5 million aggregate principal amount of its New Notes to the holders of QDI
Notes participating in the transactions and to Ares. The New Notes are
guaranteed on a senior subordinated basis by all of the Company's domestic
subsidiaries. The guarantees are full, unconditional, joint and several
obligations of the guarantors. The Company's obligations under the New Notes
and the guarantor's obligations under the guarantees are secured by a second
priority lien, subject to certain exceptions, on all of the Company's domestic
assets and the domestic assets of the guarantors that secure the credit
agreement and the interest rate protection and other hedging agreements
permitted thereunder, excluding capital stock and other securities owned or
held by the Company or the Company's existing and future subsidiaries. The New
Notes bear interest at a rate of 12 1/2% per annum, of which 7 1/4% per annum
is payable in cash and 5 1/4% per annum is payable in kind, subject to
increases in the cash portion if total leverage ratio or senior leverage ratio
targets are met.
The carrying amount of the New Notes has been adjusted by $14.3
million to reflect accounting under FAS 15 and will be amortized over the life
of the New Notes as a reduction in interest expense. After the closing of the
22
transactions, $25.6 million in aggregate principal amount and carrying amount
of the QDI Notes remains outstanding. In addition, as a result of the closing
of the transactions, the amendments to the financial covenants contained in the
Fifth Amendment to our credit agreement previously entered into by QDI Inc. and
the Company became effective as discussed below.
In connection with the Exchange Offer, deferred debt issue costs
relating to the fourth amendment of our credit agreement totaling approximately
$4.2 million and legal and advisory fees relating to the Exchange Offer
totaling approximately $5.9 million were recorded as transaction expenses.
Our primary cash needs consist of capital expenditures and debt
service under our credit agreement and the New Notes. We incur capital
expenditures for the purpose of replacing older tractors and trailers,
purchasing new tractors and trailers, and maintaining and improving
infrastructure, including the integration of the information technology system.
We have historically sought to acquire smaller local operators as part
of our program of strategic growth. We continue to evaluate potential accretive
acquisitions in order to capitalize on the consolidation occurring in the
industry and expect to fund such acquisitions from available sources of
liquidity, including borrowings under the revolving credit facility.
While uncertainties relating to environmental, labor and regulatory
matters exist within the trucking industry, management is not aware of any
trends or events likely to have a material adverse effect on liquidity or the
accompanying financial statements. Our credit rating is affected by many
factors, including our financial results, operating cash flows and total
indebtedness. We believe that based on current levels of operations and
anticipated growth, our cash flow from operations, together with available
sources of liquidity, including borrowings under the revolving credit facility,
will be sufficient to fund anticipated capital expenditures and make required
payments of principal and interest on our debt, including obligations under our
credit agreement and satisfy other long-term contractual commitments for the
next twelve months. The following is a schedule of our long-term contractual
commitments, including current portion of our long-term indebtedness at December
31, 2002, over the periods we expect them to be paid (dollars in thousands).
BALANCE
AT 12/31/02 2003 2004 2005 2006 AFTER
----------- ------ -------- -------- ------- -------
Operating leases -- $3,150 $ 2,072 $ 1,759 $ 1,190 $ --
Unconditional purchase commitment -- 2,000 -- -- -- 2,000
Total indebtedness, including
capital lease obligations $368,934 3,251 107,725 132,070 69,808 56,080
-------- ------ -------- -------- ------- -------
Total $368,934 $8,401 $109,797 $133,829 $70,998 $58,080
======== ====== ======== ======== ======= =======
Additionally we have $33.0 million of environmental liabilities, $17.6
million of pension plan and other long term insurance claim obligations and
$22.1 million in letters of credit outstanding we expect to pay out over the
next five to seven years.
The transactions that occurred on May 30, 2002 significantly changed
our capital structure and long-term contractual commitments from those that
existed on December 31, 2001. In particular, the transactions reduced our
overall level of indebtedness by exchanging $114.4 million principal amount of
the QDI notes which were outstanding at December 31, 2001 for approximately
$54.5 million principal amount of the new notes issued by us and the following
securities issued by our parent, QDI Inc.: approximately $14.8 million of 12%
Junior Subordinated Pay-in-Kind Notes due 2009; approximately $30.5 million of
13.75% preferred stock; and warrants to purchase 171,282 shares of QDI Inc.
common stock. Further, indebtedness outstanding under our credit agreement was
reduced by $10 million with the cash proceeds received by QDI Inc. from the
issuance of additional shares of 13.75% preferred stock. The transactions also
had the effect of reducing our annual cash debt service requirements because the
New Notes bear interest at a rate of 12 1/2% per annum, of which 7 1/4% per
annum is paid in cash and 5 1/4% per annum is paid in kind in the form of
additional notes, subject to certain exceptions.
The following is a schedule of our indebtedness, exclusive of capital
lease obligations, at December 31, 2002 over the periods we expect them to be
paid (dollars in thousands). With respect to the New Notes, the schedule
reflects the $54.5 million principal amount of notes originally issued on May
30, 2002 and the $20.1 million principal amount of new notes to be issued as
payable-in-kind interest accruing at the assumed rate of 5 1/4% per annum from
May 30, 2002 to June 15, 2008, but it does not reflect the cash interest that
accrues on the New Notes.
23
OUR CREDIT AGREEMENT
-------------------------------------------------------
TRANCHE A TRANCHE B TRANCHE C TRANCHE D REVOLVER QDI NOTES NOTES TOTAL
--------- --------- --------- --------- -------- --------- ------- --------
2003 $ 846 $ 985 $ 846 $ 2,677
2004 79,896 984 845 $26,000 107,725
2005 92,227 39,843 132,070
2006 39,208 $5,000 $25,600 69,808
Thereafter $74,587 74,587
------- ------- ------- ------ ------- ------- ------- --------
$80,742 $94,196 $80,742 $5,000 $26,000 $25,600 $74,587 $386,867
======= ======= ======= ====== ======= ======= ======= ========
If our operating cash flow and borrowings under our revolving credit
facility are not sufficient to satisfy our capital expenditures, debt service
and other long-term contractual commitments, we will be required to seek
alternative plans. These alternatives would likely include another
restructuring or refinancing of our long-term debt, the sale of a portion or
all of our assets or operations or the sale of additional debt or equity
securities. If these alternatives are not available in a timely manner or on
satisfactory terms, or are not permitted under our existing agreements, we may
default on some or all of our obligations. If we default on our obligations,
including our financial covenants required to be maintained under the credit
agreement, and the debt under our credit agreement or the indenture were to be
accelerated, our assets may not be sufficient to repay in full all of our
indebtedness, including the New Notes, and we may be forced into bankruptcy. In
a bankruptcy proceeding, our creditors could challenge the issuance of the New
Notes or the New Notes guarantees as preferential transfers or fraudulent
conveyances, respectively. If such challenges are successful, holders of New
Notes could become unsecured creditors of ours and their claims against us
could be subordinated to claims of creditors of our subsidiaries.
As a holding company with no significant assets other than ownership of
100% of our membership units, QDI Inc. also depends upon our cash flows to
service its debt. QDI Inc. is substantially more leveraged than us. At December
31, 2002, QDI Inc.'s consolidated long-term indebtedness, which consists
primarily of our long-term indebtedness, the QDI Inc. notes and the QDI Junior
PIK Notes was $397.6 million. In addition, the amount outstanding at the
aggregate liquidation preference of QDI Inc.'s 13.75% preferred stock, which is
mandatorily redeemable on September 15, 2006, was $56.5 million and QDI Inc.
also had $1.2 million of redeemable common stock. The following is a schedule of
QDI Inc.'s consolidated long-term contractual commitments, including the current
portion of long-term indebtedness, at December 31, 2002 over the period in which
they are required to be paid (dollars in thousands):
12% JUNIOR
SUBORDINATED MANDATORILY TOTAL
PAY-IN- REDEEMABLE QD LLC QDI INC.
KIND NOTES SECURITIES COMMITMENTS CONSOLIDATED
------------ ----------- ----------- ------------
2003 $ 1,209 $ 2,677 $ 3,886
2004 107,725 107,725
2005 132,070 132,070
2006 56,450 69,808 126,258
Thereafter $26,753 74,587 101,340
------- ------- -------- --------
$26,753 $57,659 $386,867 $471,279
======= ======= ======== ========
QDI Inc.'s 12% Junior PIK Notes become due on June 15, 2009 and bear
interest at a rate of 12% per annum, of which 1% per annum is payable in cash
and 11% per annum is payable in kind. The schedule reflects $12.6 million
principal amount of QDI Junior PIK Notes originally issued and $14.2 million
principal amount of new QDI Junior PIK Notes to be issued as payable-in-kind
interest accruing at the rate of 11% per annum from May 30, 2002 to June 15,
2009, but it does not reflect the cash interest that accrues on the QDI Junior
PIK Notes. Interest is payable semi-annually on June 15 and December 15
commencing June 15, 2002 and ending on June 15, 2009. The annual cash interest
payments range from $120,000 in 2002 to $250,000 in 2008. Neither we nor any of
our subsidiaries guarantee any of QDI Inc.'s obligations under the QDI Junior
PIK Notes.
QDI Inc's mandatorily redeemable securities consist of $56.5 million
of 13.75% mandatorily redeemable preferred stock, which becomes due on
September 15, 2006 and $1.2 million of redeemable common stock, which is
24
redeemable upon the stockholder's put right anytime after June 15, 2002. The
redemption amount for the redeemable common stock is based on a fair market
value calculation set forth under the terms of the agreement. Neither we nor
any of our subsidiaries guarantee any of QDI Inc.'s obligations under the
mandatorily redeemable preferred stock or the redeemable common stock.
Our ability to make distributions to QDI Inc. is restricted by the
covenants contained in our credit agreement and the indenture. However, Apollo
as the controlling shareholder of QDI Inc. may have an interest in pursuing
reorganizations, restructurings or other transactions involving us and QDI Inc.
that, in their judgment, could enhance their equity investment even though
those transactions might involve increasing our leverage or impairing our
creditworthiness in order to decrease QDI Inc.'s leverage. While the
restrictions in the indenture cover a wide variety of arrangements which have
traditionally been used to effect highly leveraged transactions, the indenture
may not afford the holders of the New Notes protection in all circumstances
from the adverse aspects of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction. Although QDI Inc. has no current
intention to engage in these types of transactions, there can be no assurance
it will not do so in the future if permitted under the terms of the credit
agreement and the indenture.
FORWARD-LOOKING STATEMENTS AND CERTAIN CONSIDERATIONS
This report along with other documents that are publicly disseminated
by the Company, and oral statements that are made on behalf of the Company
contain or might contain forward-looking statements within the meaning of the
Securities Exchange Act of 1934, as amended. All statements included in this
report, and in any subsequent filings made by the Company with the Commission
other than statements of historical fact, that address activities, events or
developments that the Company or management expect, believe or anticipate will
or may occur in the future are forward-looking statements. These statements
represent the Company's reasonable judgment on the future and are subject to
risks and uncertainties that could cause the Company's actual results and
financial position to differ materially. Examples of forward-looking statements
include: (i) projections of revenue, earnings, capital structure and other
financial items, (ii) statements of the plans and objectives of the Company and
its management, (iii) statements of expected future economic performance and
(iv) assumptions underlying statements regarding our business. Forward-looking
statements can be identified by, among other things, the use of forward-looking
language, such as "believes," "expects," "estimates," "may," "will," "should,"
"seeks," "plans," "intends," "anticipates," or "scheduled to" or the negatives
of those terms, or other variations of those terms or comparable language, or
by discussions of strategy or other intentions.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that could cause the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions. Important factors that could cause our actual results to be
materially different from the forward-looking statements include the risks and
other factors identified in the Company's Registration Statement on Form S-4
(No. 333-98077) and the additional factors set forth below
Substantial Leverage- We are highly leveraged, which may restrict our
ability to fund or obtain financing for working capital, capital expenditures
and general corporate purposes, making us more vulnerable to economic
downturns, competition and other market pressures.
Ability To Extend Revolver Maturity Under Credit Agreement- Our
revolving credit agreement becomes due in June 2004 and there are no assurances
that we will be able to refinance this obligation. Our liquidity would be
materially adversely affected if we did not have borrowing availability under a
revolving credit facility and had to rely solely on our cash flow from operating
activities.
Economic Factors- The trucking industry has historically been viewed
as a cyclical industry due to various economic factors over which we have no
control such as excess capacity in the industry, the availability of qualified
drivers, changes in fuel and insurance prices, including changes in fuel taxes,
changes in license and regulation fees, toll increases, interest rate
fluctuations, and downturns in customer's business cycles and shipping
requirements.
Dependence on Affiliates and Owner-Operators- A reduction in the
number of affiliates or owner-operators whether due to capital requirements or
the expense of obtaining, or maintaining equipment or otherwise could have
25
a material adverse impact on our operations and profitability. Likewise, a
continued reduction in our freight revenue rates could lessen our ability to
attract and retain owner-operators, affiliates and company drivers.
Regulation- We are regulated by the United States Department of
Transportation ("DOT") and by various state agencies. These regulatory
authorities exercise broad powers, governing activities such as the
authorization to engage in motor carrier operations, safety, financial
reporting, and certain mergers, consolidations and acquisitions. The trucking
industry is also subject to regulatory and legislative changes (such as
increasingly stringent environmental regulations or limits on vehicle weight
and size) that may affect the economics of the industry by requiring changes in
operating practices or by affecting the cost of providing services. A
determination by regulatory authorities that we violated applicable laws or
regulations could materially adversely affect our business and operating
results.
Environmental Risk Factors- We have material exposure to both changing
environmental regulations and increasing costs relating to environmental
compliance. While we make significant expenditures relating to environmental
compliance each year, there can be no assurance that environmental issues will
not have a material adverse effect on us. See "Business - Environmental
Matters" for a discussion of the environmental and regulatory risks to which we
are exposed.
Claims Exposure- We currently maintain liability insurance for bodily
injury and property damage claims, covering all employees, owner-operators and
affiliates, and worker's compensation insurance coverage on our employees and
company drivers. This insurance includes deductibles of $5 million dollars per
incident for auto liability and $1 million dollars for workers compensation for
periods after September 15, 2002. From January 1, 2002 through September 14,
2002 we carried a $2 million deductible for auto liability insurance. As such,
we are subject to liability as a self-insurer to the extent of these deductibles
under the policy. We are self-insured for damage to the equipment we own or
lease, and for cargo losses. We are subject to changing conditions and pricing
in the insurance marketplace and there can be no assurance that the cost or
availability of various types of insurance may not change dramatically in the
future. To the extent these costs cannot be passed on by increased freight rates
or surcharges, increases in insurance cost could reduce our future
profitability.
Future War/Anti-Terrorism Measures - In the aftermath of the terrorist
attacks of September 11, 2001, federal, state and municipal authorities have
implemented and continue to implement various security measures, including
checkpoints and travel restrictions on large trucks. Such existing measures and
future measures may have significant costs which a motor carrier, such as us,
is required to bear. In addition, war or risk of war may also have adverse
effect on the economy and our business and on our ability to raise capital if
the financial markets are impacted.
Other important factors that could cause our actual results to be
materially different from the forward-looking statements include general
economic conditions, cost and availability of diesel fuel, adverse weather
conditions and competitive rate fluctuations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivatives
We utilize derivative financial instruments to reduce our exposure to
market risk from changes in interest rates and foreign exchange rates. The
instruments primarily used to mitigate these risks are interest rate swaps and
foreign exchange contacts. All derivative instruments held by us are designated
as hedges, and accordingly, the gains and losses from changes in derivative
fair values are recognized as comprehensive income as required by SFAS 133.
Gains and losses upon settlement are recognized in the statement of operations
or recorded as part of the underlying asset or liability as appropriate. We are
exposed to credit related losses in the event of nonperformance by counter
parties to these financial instruments; however, counter parties to these
agreements are major financial institutions; and the risk of loss due to
nonperformance is considered by management to be minimal. We do not hold or
issue interest rate swaps or foreign exchange contracts for trading purposes.
We had approximately $294 million and $344 million of variable interest
debt outstanding at December 31, 2002 and 2001, respectively. We entered into
interest rate swap agreements designated as a partial hedge of our portfolio of
variable rate debt during 2001. The purpose of these swaps is to fix interest
rates on variable rate debt
26
and reduce certain exposures to interest rate fluctuation. As of December
31, 2002, there were no outstanding interest rate swaps.
On February 26, 2001, we entered into swap agreements on $30 million
and $100 million of our variable interest rate debt. The Company paid counter
parties interest at fixed rates of 4.96% and 5.155%. The latter is retroactive
to January 1, 2001. Counter parties paid the Company interest at a variable
rate equal to LIBOR. These agreements matured and renewed every three months
and terminated on August 1, 2002 and July 2, 2002, respectively.
On March 21, 2001, we entered into a swap agreement on $30 million of
our variable interest rate debt. The Company paid counter parties interest at a
fixed rate of 4.765%. Counter parties paid the Company interest at a variable
rate equal to LIBOR. This agreement matured and renewed every three months and
terminated September 22, 2002.
At December 31, 2001, we had interest rate swaps with a notional
amount of $160 million. The notional amount does not represent a measure of
exposure of the Company. At December 31, 2002 there were no active swap
agreements with the Company.
At December 31, 2001, we entered into short-term foreign currency
agreements to exchange US dollars (US $0.3 million) for Canadian dollars (CN
$0.48 million). The purpose of these agreements was to hedge against
fluctuations in foreign currency exchange rates. We are required to make US
dollar payments at a 1.59% fixed exchange rate. The market risk based upon a
10% fluctuation in the exchange rate is immaterial. At December 31, 2002, there
were no active foreign currency hedge agreements.
At December 31, 2002, a 1 point rate change in our variable interest
bearing debt would result in an annual $2.9 million change in our annual
interest expense.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Financial statements and exhibits filed under this item are
listed in the index appearing in Item 15 of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of December 31,
2002 with respect to the members of our board of managers and our executive
officers, who also hold the same positions with our parent, QDI Inc.:
NAME AGE POSITION
- ---- --- --------
Thomas L. Finkbiner 50 Manager, Chairman of the Board, President, Chief
Executive Officer
Samuel M. Hensley 41 Senior Vice President and Chief Financial Officer
Virgil T. Leslie 47 Executive Vice President and General Manager
Keith J. Margelowsky 47 Senior Vice President of Performance Planning
Michael A. Grimm 55 Executive Vice President--Affiliate Relations
Charles J. O'Brien 64 Manager
Richard J. Brandewie 48 Manager
Joshua J. Harris 38 Manager
Michael D. Weiner 49 Manager
Robert H. Falk 64 Manager
Marc J. Rowan 40 Manager
John H. Kissick 60 Manager
Marc E. Becker 30 Manager
Donald C. Orris 61 Manager
27
Our managers hold office until their successors have been elected and
qualified, or, if earlier, upon their death, resignation, removal or
disqualification. Officers serve at the discretion of the Board of Managers.
THOMAS L. FINKBINER became our President, Chief Executive Officer and
a member of our Board of Managers on May 14, 2002, and became our Chairman on
June 19, 2002. Mr. Finkbiner has been employed by QDI Inc. since November 1999
as its President and Chief Executive Officer. He has been a director of QDI
Inc. since March 2000. Prior to his employment by QDI Inc., he was Vice
President, Intermodal for Norfolk Southern Corporation from 1987-1999, Vice
President of Marketing and Administration and Vice President of Sales for North
American Van Lines (then an operating subsidiary of Norfolk Southern) from
1981-1987. Prior to these positions he held various sales and management
positions with Airborne Freight Corporation and Roadway Express, Inc. from
1976-1981. Mr. Finkbiner serves as Chairman of the Board of Directors for
Intermodal Transportation Institute, University of Denver. He is a director of
Pacer International, Inc.
SAMUEL M. HENSLEY became our Senior Vice President and Chief Financial
Officer on October 31, 2002. Prior to his employment with us and QDI Inc., Mr.
Hensley served as Vice President, Chief Financial Officer and Treasurer for
Cendian Corporation, a global logistics and distribution services company for
the chemical industry, since 2000. From 1993 to 2000, he was Corporate
Controller for Georgia Gulf Corporation, a manufacturer of commodity and
specialty chemicals. Prior to these positions, he had various senior positions
with Arthur Andersen LLP from 1983 to 1993.
VIRGIL T. LESLIE became our Senior Vice President of Sales and
Marketing on May 14, 2002. Mr. Leslie joined QDI Inc. in April 2000 as Senior
Vice President of Sales and Marketing. Prior to joining QDI Inc., he served as
Vice President of Sales with Triple Crown Services in Ft. Wayne, Indiana. Mr.
Leslie also spent 16 years with Roadway Express holding various sales and
operating positions.
KEITH J. MARGELOWSKY became our Senior Vice President of Performance
Planning on May 14, 2002. Mr. Margelowsky joined QDI Inc. in April 2000 as
Senior Vice President of Performance Planning and is responsible for improving
QDI Inc.'s systems, procedures and capabilities. Prior to joining QDI Inc., he
led the marketing effort for Werner Logistics. He was with Werner since 1992
and has extensive pricing and costing experience. His early experience includes
five years in LTL and eleven additional years in truckload with North American
Van Lines and National Freight.
MICHAEL A. GRIMM became our Executive Vice President--Affiliate
Relations on May 14, 2002. Mr. Grimm joined QDI Inc. in 1989 in connection with
the acquisition of Quality-O'Boyle, Inc. by Montgomery Tank Lines, then serving
as Senior Vice President of Sales. Prior to his association with QDI Inc. he
served in various positions with O'Boyle Tank Lines.
CHARLES J. O'BRIEN, JR. became a member of our Board of Managers on
May 14, 2002 and was our Chairman from such date until June 19, 2002. Mr.
O'Brien joined QDI Inc. in 1989 in connection with the acquisition of
Quality-O'Boyle, Inc. He was also elected to the Board of Directors of QDI Inc.
at that time. From 1991 through November 1999 he served as QDI Inc.'s President
and Chief Executive Officer and served as its Chairman of the Board from
September 1998 to June 2002. Prior to joining QDI Inc., he was a controlling
shareholder of Quality-O'Boyle, Inc. from January 1977 to February 1989. Prior
to his association with Quality-O'Boyle, Inc., he held various positions with
Matlack Systems, Inc. from April 1962 through December 1976. He served as
Matlack's Chief Executive Officer from 1969 to 1976 and served as a director of
Rollins International, Inc., Matlack's parent company. As of August 3, 2001, he
is operating as an affiliate of QDI Inc. at two trucking terminals.
RICHARD J. BRANDEWIE became a member of our Board of Managers on May
14, 2002. Mr. Brandewie is a managing general partner of Ballast Point
Ventures, a venture capital partnership. He has served as a director of QDI
Inc. and its predecessor, MTL Inc. from 1988 to the present. He had also
previously been employed by QDI Inc. or its predecessor, MTL Inc. as its Senior
Vice President, Chief Financial Officer and Treasurer from June 1992 through
June 2000. Prior to joining QDI Inc. Inc., he served as a General Partner of
South Atlantic Venture Funds I & II, where he was employed from November 1985
through June 1992. From June 1980 through November 1985, he served concurrently
as Vice President of Doan Resources Venture Fund and as General Partner of
Michigan
28
Investment Fund and MBW Venture Partners. He also served as an accountant and
financial analyst for the Ford Motor Company from 1977 to 1979.
JOSHUA J. HARRIS became a member of our Board of Managers on May 14,
2002. Mr. Harris has been a director of QDI Inc. since June 1998. Mr. Harris is
a partner of Apollo Management, L.P. and has served as an officer of certain
affiliates of Apollo since 1990. Prior to that time, Mr. Harris was a member of
the Mergers and Acquisitions department of Drexel Burnham Lambert Incorporated.
Mr. Harris is also a director of Florsheim Group, Inc., NRT, Incorporated,
Breuners Home Furnishings Corporation, Pacer International, Inc., Resolution
Performance Products, Inc., Resolution Performance Products LLC and Clark
Retail Enterprises, Inc
MICHAEL D. WEINER became a member of our Board of Managers on May 14,
2002. Mr. Weiner has been a director of QDI Inc. since June 1998. Mr. Weiner is
a principal of Apollo and has served as a Vice President and general counsel of
Apollo Management and certain affiliates of Apollo since 1992. Prior to 1992,
Mr. Weiner was a partner in the law firm of Morgan, Lewis & Bockius LLP,
specializing in securities law, public and private financing, and corporate and
commercial transactions. Mr. Weiner is also a director of NRT, Incorporated,
and Florsheim Group, Inc.
ROBERT H. FALK became a member of our Board of Managers in June of
2002. Mr. Falk is a partner of Apollo. Prior to joining Apollo in 1992, Mr.
Falk was a senior partner in the law firm of Skadden, Arps, Slate, Meagher &
Flom. Mr. Falk serves on several boards of directors including Samsonite
Corporation and Compass Minerals Group, Inc.
MARC J. ROWAN became a member of our Board of Managers on May 14,
2002. Mr. Rowan has been a director of QDI Inc. since June 1998. Mr. Rowan is a
principal of Apollo and has served as a Vice President of Apollo Management and
certain affiliates of Apollo since 1990. From 1985 until 1990, Mr. Rowan was
with Drexel Burnham Lambert Incorporated, most recently as Vice President with
responsibilities in high yield financing, transaction idea generation and
merger structure and negotiation. Mr. Rowan is also a director of Vail Resorts,
Inc., AMC Entertainment, National Financial Partners Corporation, Rare Medium
Group, Inc., Samsonite Corporation, Wyndham International, Inc. and NRT,
Incorporated.
JOHN H. KISSICK became a member of our Board of Managers on May 14,
2002. Mr. Kissick has been a director of QDI Inc. since June 1998. Mr. Kissick
has been a principal since 1991 of Apollo Management and certain affiliates of
Apollo. From 1990 to 1991, Mr. Kissick was a consultant with Kissick &
Associates, an investment advisory firm. Prior to 1990, Mr. Kissick served as a
Senior Executive Vice President of Drexel Burnham Lambert Incorporated, where
he began work in 1975, heading its Corporate Finance and High Yield Bond
Departments. Mr. Kissick is also a director of Florsheim Group, Inc.
MARC E. BECKER became a member of our Board of Managers on May 14,
2002. Mr. Becker has been a director of QDI Inc. since June 1998. Mr. Becker
has been associated with Apollo Management, L.P. since 1996. Prior to that
time, Mr. Becker was employed by Smith Barney Inc. in the Financial
Entrepreneurs group within its Investment Banking division. Mr. Becker serves
on several boards of directors including National Financial Partners
Corporation, Pacer International, Inc. and WMC Mortgage Corp.
DONALD C. ORRIS became a member of our Board of Managers on May 14,
2002. Mr. Orris has been a director of QDI Inc. since 1999. Mr. Orris has been
Chairman, President and Chief Executive Officer of Pacer International, Inc.
since May 1999. From Pacer Logistics' inception in March 1997 until May 1999,
he served as Chairman, President and Chief Executive Officer of Pacer
Logistics. Mr. Orris served as President of Pacer International Consulting LLC,
a wholly owned subsidiary of Pacer Logistics since September 1996. From January
1995 to September 1996, Mr. Orris served as President and Chief Operating
Officer, and from 1990 until January 1995, he served as Executive Vice
President, of Southern Pacific Transportation Company. Mr. Orris was the
President and Chief Operating Officer of American Domestic Company and American
President Intermodal Company from 1982 until 1990.
Item 11 EXECUTIVE COMPENSATION
Prior to our formation in 2002, our executive officers who held the
same positions with our parent, QDI Inc., were compensated by QDI Inc. for such
services. The following table sets forth the total compensation paid by QDI
Inc. for services rendered by our Chief Executive Officer, our four other most
highly compensated officers who
29
were serving as such at December 31, 2002 and two former highly compensated
officers (the "Named Executive Officers") during the year ended December 31,
2002.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION ALL
AWARDS OTHER
SECURITIES COMPEN-
ANNUAL UNDERLYING SATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) (1)
- --------------------------- ---- ------ ----- ------------- -------
Thomas L. Finkbiner 2002 $253,545 -- -- $ 6,773
President and Chief Executive Officer 2001 258,000 -- -- 113,569
2000 260,000 75,000 25,000 7,826
Douglas B. Allen 2002 162,077 -- -- 7,656
Former Senior Vice President--Operations(2) 2001 196,923 -- -- 92,484
Dennis R. Farnsworth 2002 190,500 -- -- 7,656
Former Chief Financial Officer(3) 2001 188,885 -- -- 20,425
Virgil T. Leslie 2002 172,543 -- -- 6,773
Senior Vice President, Sales(4) 2001 159,115 15,000 -- 13,886
Dennis R. Copeland 2002 164,764 -- -- 6,773
Vice President, Administration 2001 153,320 14,042 -- 12,929
2000 145,000 20,700 -- 5,102
Michael A. Grimm 2002 162,184 -- -- 6,773
Senior Vice President
Keith Margelowsky 2002 156,352 -- -- 6,773
Senior Vice President
- ---------
(1) Amounts shown represent employer contributions to the profit sharing
and 401(k) plans, automobile allowance and relocation reimbursement.
QDI maintains various employee benefits and compensation plans,
including an incentive bonus plan and 401(k) savings plan.
(2) Douglas B. Allen joined QDI in December 2000. He served as Senior Vice
President--Operations and Chief Operating Officer until he resigned
from QDI effective September 13, 2002.
(3) Dennis R. Farnsworth joined QDI in April 2000. He served as Chief
Financial Officer until he resigned from such position effective
October 31, 2002.
(4) Virgil T. Leslie joined QDI in April 2000.
MANAGER'S COMPENSATION
The members of our Board of Managers do not receive compensation for
their service on the Board of Managers but are reimbursed for out-of-pocket
expenses.
Each of the members of our Board of Managers also serves as a director
of QDI Inc. and may be compensated for such services by QDI. Two outside
directors of QDI Inc. have been compensated $1,000 per month plus $1,500 per
meeting. Additionally, both outside directors received 2,000 options each in
2001, which were forfeited in 2002.
OPTION GRANTS IN LAST FISCAL YEAR
Neither we nor QDI Inc. have granted options to the Named Executive
Officers in 2002.
30
YEAR-END OPTION VALUES
No named executive officers held options at year-end.
EMPLOYMENT AND RELATED AGREEMENTS
On May 30, 2002 pursuant to the contribution agreement with QDI Inc.,
we assumed the obligations of QDI Inc. under the employment agreements
summarized below.
EMPLOYMENT AGREEMENTS.
On November 8, 1999, QDI Inc. entered into an employment agreement with
Thomas L. Finkbiner as President and Chief Executive Officer of QDI Inc. with a
base salary of $260,000 per annum. His incentive is based upon achievement of
plan at 50% of base salary with an additional bonus of 25% of base salary
potential, subject to evaluation by the Board of Directors. The employment
agreement provides for a two-year term of service, with an automatic one-year
extension on each anniversary date, unless QDI Inc. or Mr. Finkbiner gives
notice that the term will not be so extended.
On November 27, 2000, QDI Inc. entered into an employment agreement
with Douglas B. Allen to perform the duties of Chief Operating Officer and
Senior Vice President of QDI Inc. with a base salary of $190,000 per annum. His
incentive bonus of up to 40% of his annual salary is based on pre-determined
performance standards subject to the QDI Inc. Board's discretion. The employment
agreement provides for a one-year term, with an automatic one-year extension on
each anniversary date, unless QDI Inc. or Mr. Allen give notice that the term
will not be so extended. Mr. Allen resigned from his position with QDI Inc.
effective September 16, 2002.
On March 27, 2000, QDI Inc. entered into an employment agreement with
Virgil T. Leslie to perform the duties of Senior Vice President of Sales and
Marketing for QDI Inc. with a base salary of $150,000 per annum. His incentive
bonus of up to 35% of his annual salary is based on pre-determined performance
standards subject to the QDI Inc. Board's discretion. The employment agreement
provides for a two-year term, with an automatic one-year extension on each
anniversary date, unless QDI Inc. or Mr. Leslie give notice that the term will
not be so extended.
On March 21, 2000, QDI Inc. entered into an employment agreement with
Dennis R. Farnsworth to perform the duties of Senior Vice President of Finance
and Chief Financial Officer for QDI Inc. with a base salary of $165,000 per
annum. His incentive bonus of up to 40% of his annual salary is based on
pre-determined performance standards subject to the QDI Inc. Board's discretion.
The employment agreement provides for a two-year term, with an automatic
one-year extension on each anniversary date, unless QDI Inc. or Mr. Farnsworth
give notice that the term will not be so extended. Mr. Farnsworth resigned from
his position as Senior Vice President and Chief Financial Officer of QDI Inc.
effective October 31, 2002.
On June 23, 1998, QDI Inc. entered into an employment agreement with
Dennis R. Copeland to perform the duties of Vice President of Administration for
QDI Inc. with a base salary of $145,000 per annum. His incentive bonus of up to
25% of his annual salary is based on pre-determined performance standards
subject to the QDI Inc. Board's discretion. The employment agreement provides
for a two-year term, with an automatic one-year extension on each anniversary
date, unless QDI Inc. or Mr. Copeland give notice that the term will not be so
extended.
On June 23, 1998 QDI Inc. entered into an employment agreement with
Michael Grimm to perform the duties of Executive Vice President-Sales and
Marketing with a base salary of $154,063 per annum. His incentive bonus of up to
20% of his annual salary is based in predetermined performance standards subject
to the QDI Inc. Board's discretion. The employment agreement provides for a two
year term, with an automatic one year extension on each anniversary date, unless
QDI Inc. or Mr. Grimm give notice that his term will not be so extended.
On February 5, 2003 QDI Inc. entered into an employment agreement with
Samuel Hensley to perform the duties of Senior Vice President Finance and Chief
Financial Officer with a base salary of $195,000. The employment agreement
provides for a two year term, with an automatic one year extension on each
anniversary date, unless QDI Inc. or Mr. Hensley give notice that the term will
not be so extended.
On April 10, 2000 QDI Inc. entered into an employment agreement with
Keith Margelowsky to perform the duties of Senior Vice President of Performance
Planning with a base salary of $150,000. The employment agreement
31
provides for a two year term, with an automatic one year extension on each
anniversary date, unless QDI Inc. or Mr. Margelowsky give notice that the term
will not be so extended.
Each of the employment agreements listed above provide for certain
severance payments to be made if the employment of any such executives is
terminated without "cause" or if such executive resigns for a "good reason,"
such as after the occurrence of one of a number of specified changes in such
executive's employment, including:
- a material diminution by QDI Inc. of the executive's duties
and responsibilities
- a material breach by QDI Inc. of its compensation and benefit
obligations, or
- an involuntary relocation by more than 50 miles from Tampa,
Florida.
Under such circumstances:
- Mr. Finkbiner would be entitled to receive his base salary for
the remainder of the term of his employment, a pro rated bonus
and continued medical and other benefits;
- All other contracted Executives would be entitled to receive
his base salary for one year after such termination and
continued medical and other benefits.
Effective October 23, 2001, QDI Inc. and Charles J. O'Brien, Jr.
modified his current agreement to provide that Mr. O'Brien's title would change
to Special Assistant to the CEO with a base salary of $52,000 per year through
June 30, 2002.
Effective July 1, 2000, QDI Inc. and Richard J. Brandewie modified his
current agreement to provide that Mr. Brandewie's title would change to
Executive Vice President with a base salary of $100,000 per year through June
30, 2002 subject to the terms of his previous agreement. His bonus incentives
remain unchanged, however, he had returned 11,000 of his 22,000 stock options to
QDI.
Other senior executives hold employment agreements with QDI Inc. with
various terms and conditions
SHAREHOLDERS' AGREEMENT
Elton E. Babbitt, Charles J. O'Brien, Jr. and Richard J. Brandewie have
entered into a shareholders' agreement with Apollo governing certain aspects of
the relationship among such shareholders and QDI Inc.. This agreement was not
assigned to us by QDI pursuant to our contribution agreement with QDI Inc. and
has not subsequently been assigned. The shareholders' agreement contains, among
other matters,
- a provision restricting the rights of Elton E. Babbitt to
transfer his shares of QDI Inc. common stock, subject to
certain permitted or required transfers and a right of first
refusal in favor of Apollo;
- certain registration rights in the event QDI Inc. effect's a
registration of QDI Inc. securities;
- certain preemptive rights with respect to the sale of QDI Inc.
common stock and equity securities convertible into QDI Inc.
common stock; and
- certain rights of Charles J. O'Brien, Jr. to cause QDI Inc. to
purchase from him at then fair market value up to such number
of shares with a value equal to the implied value of his
investment in QDI Inc. common stock at the Effective Time.
The shareholders' agreement became effective on June 9, 1998 and will
terminate upon the earlier of
- the tenth anniversary thereof; and
- such time as QDI Inc. is a public company with equity
securities listed on a national securities exchange or o
publicly traded in the over-the-counter market; provided,
however, that certain transfer restrictions and registration
rights will survive notwithstanding QDI being a public
company.
32
Pursuant to the shareholders' agreement, Apollo is entitled to a
transaction fee of up to 1.0% of the value of each transaction entered into by
QDI, as determined in the sole discretion of Apollo. Such fee is in addition to
the management fees payable to Apollo as set forth in the management agreement
between Apollo and QDI described below.
NON-COMPETITION AGREEMENTS
On May 30, 2002, pursuant to the contribution agreement with QDI Inc.,
we assumed the obligations of QDI Inc. under the non-competition agreements set
forth below.
Each of Gordon Babbitt and Elton E. Babbitt, a former shareholder in
QDI, has entered into a non-competition agreement with QDI Inc. that contains,
among other things, a covenant not to compete with QDI Inc. Pursuant to such
covenant, Elton E. Babbitt has agreed that he will not, for a period of five
years from the Effective Date (as defined in the Non-Competition Agreement),
engage in the bulk transportation services business or in any related business
(the "BTS Business") within any geographic area in which any member of the QDI
Inc. Group (as defined in the non-competition agreement) conducts its business.
Ownership of up to 2.0% of a publicly traded enterprise engaged in a BTS
Business, without otherwise participating in such enterprise, would not be a
violation of such covenant not to compete. Gordon Babbitt had agreed that he
will not, for a period of three years from June 9, 1998, engage in the for-hire,
common carrier tank truck transportation business within the United States and
Canada. Ownership of up to 2.0% of a publicly traded enterprise engaged in such
business, without otherwise participating in such enterprise, would not be a
violation of such covenant not to compete.
In addition, Elton E. Babbitt and Gordon Babbitt have each agreed, for
a period of five years from the Effective Date with respect to Elton E. Babbitt,
and for a period of three years from the Effective Date with respect to Gordon
Babbitt, not to request, induce, attempt to influence or have any other business
contact with
- any distributor or supplier of goods or services to any member
of the QDI Inc. Group to curtail or cancel any o business they
may transact with any member of the QDI Inc. Group (as defined
in the Non-Competition Agreements);
- any customers of any member of the QDI Inc. Group that have
done business with or potential customers which o have been in
contact with any member of the QDI Inc. Group to curtail or
cancel any business they may transact with any member of the
QDI Inc. Group;
- any employee of any member of the QDI Inc. Group to terminate
his employment with such member of the QDI Inc. Group or;
- any governmental entity or regulatory authority to terminate,
revoke or materially and adversely alter or impair any
license, authority or permit held, owned, used or reserved for
the QDI Group.
APOLLO MANAGEMENT AGREEMENT
QDI and Apollo Management, L.P. have entered into a management
agreement whereby QDI Inc. appointed Apollo Management following the
consummation of the merger to provide financial and strategic advice to QDI Inc.
Pursuant to the terms of the management agreement, Apollo Management has agreed
at such time to provide financial and strategic services to QDI Inc. as
reasonably requested by QDI Inc.'s Board of Directors. As consideration for
services to be rendered under the management agreement, Apollo Management
received an initial fee of $2.0 million on June 9, 1998 and thereafter will
receive an annual fee of $500,000 until termination of the management agreement.
The management agreement may be terminated upon 30 days' written notice by
Apollo Management or QDI to the other party thereto. This agreement was not
assigned or assumed by us as part of the contribution agreement between us and
QDI Inc. but payments by us to QDI Inc. are specifically permitted under our
indenture. This agreement was suspended in 2002, and as such, no management fees
were accrued.
LIMITED RECOURSE SECURED PROMISSORY NOTE AND PLEDGE AGREEMENTS.
In connection with Mr. Sexton's purchase of shares of QDI Inc., QDI
Inc. made a limited recourse secured loan to Marvin Sexton in the amount of
$400,000. The loan is secured by a pledge by Mr. Sexton of all of his QDI Inc
common stock and options to purchase QDI Inc. common stock. The principal amount
of the loan is due on June 9, 2006, with
33
mandatory pre-payments due upon, and to the extent of, the receipt of after-tax
proceeds from the sale of Mr. Sexton's pledged securities.
Thomas Finkbiner signed a Limited Recourse Secured Promissory Note for
$800,000 in conjunction with the purchase of QDI Inc. stock. The loan pledge is
under similar terms and conditions as Mr. Sexton's agreement
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of our membership units are owned by QDI Inc.. The following table
sets forth certain information regarding the beneficial ownership of the QDI
Inc. common stock as of February 28, 2003, by each person known by us to be a
beneficial owner of more than 5.0% of the outstanding QDI Inc. common stock,
beneficial ownership of QDI INC. common stock by each manager and named
executive officer and all managers and executive officers as a group:
SHARES OF PERCENTAGE
NAME OF BENEFICIAL OWNER COMMON STOCK OF CLASS
Richard J. Brandewie (1)(5) 46,041 2.34%
Charles J. O'Brien, Jr. (1)(6) 37,114 1.89%
Thomas L. Finkbiner (1) 25,000 1.27%
Donald Orris(1) -- --
Douglas B. Allen -- --
Dennis R. Farnsworth -- --
Virgil T. Leslie(1) -- --
Keith J. Margelowsky(1) -- --
Michael A. Grimm(1) 5,500 *
Joshua J. Harris(2)(3)
Marc Becker(2)(3)
Michael D. Weiner(2)(3)
Robert H. Falk(2)(3)
Marc J. Rowan(2)(3)
John H. Kissick(2)(3)
Denny R. Copeland(1) 4,000 *
All executive officers and directors 117,655 5.99%
as a group (14 persons)
Apollo Investment Fund III, L.P.(4) 1,778,442 90.48%
c/o Apollo Advisors III, L.P.
Two Manhattanville Road
Purchase, New York 10577
* Less than 1.0%.
(1) The business address for Messrs. Finkbiner, Brandewie, O'Brien, Orris,
Margelowsky, Grimm, Leslie and Copeland is Quality Distribution, Inc.,
3802 Corporex Park Drive, Tampa, FL 33619.
(2) The business address for Messrs. Harris, Weiner, Falk, Rowan, Becker
and Kissick is Apollo Management, L.P., 1301 Avenue of the Americas,
New York, NY 10019.
(3) Messrs. Harris, Weiner, Falk, Rowan, Becker and Kissick are each
principals and officers of certain affiliates of Apollo. Although each
of Messrs. Harris, Weiner, Falk, Rowan, Becker and Kissick may be
deemed to beneficially own shares owned by Apollo, each such person
disclaims beneficial ownership of any such shares.
(4) Includes shares owned by Apollo Overseas Partners III, L.P., a Delaware
limited partnership, and Apollo (U.K.) Partners III, L.P., a limited
partnership organized under the laws of the United Kingdom. Also
includes 63,973 shares owned by two other institutional investors as to
which Apollo has sole voting power pursuant to the irrevocable proxy
granted by such institutional investors in the Amended and Restated
Common and Preferred Stock Purchase and Shareholder Agreement, dated as
of August 28, 1998 thereto as amended by Amendment No. 1 dated April 2,
2002. The Amended and Restated Common and Preferred
34
Stock Purchase and Shareholder Agreement dated August 28, 1998, as
amended by Amendment No. 1 thereto dated April 2, 2002, provides that
in no event shall the grant of the proxy be effective to the extent
that the voting power of the proxy, when combined with the voting power
of Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P.
or Apollo (U.K.) Partners III, L.P. would exceed 79.99% of the voting
power of QDI Inc.
(5) Includes 5,500 shares, which are issuable upon exercise of vested
options under QDI Inc.'s 1998 stock option plan.
(6) Includes 6,800 shares, which are issuable upon exercise of vested
options under QDI Inc.'s 1998 stock option plan.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
QDI Inc. and Apollo Management have entered into a management agreement
whereby we retained Apollo Management to provide financial and strategic advice
to us. Pursuant to the terms of the management agreement, Apollo Management has
agreed at such time to provide financial and strategic services to QDI Inc. as
reasonably requested by it's Board of Directors. As consideration for services
to be rendered under the management agreement, Apollo Management received an
initial fee of $2.0 million on June 9, 1998 and thereafter will receive an
annual fee of $500,000 until termination of the management agreement. The
management agreement may be terminated upon 30 days written notice by Apollo
Management or QDI Inc. to the other party thereto. Under this agreement we
recognized $500,000 in selling and administrative expense in 2000 and 2001. The
agreement was suspended for 2002 and we did not recognize any selling and
administrative expense for these services. In 2002, we entered into an agreement
to provide advisory and consulting services to Apollo Management and certain of
its affiliates. The annual fee for these services is $300,000, and was
recorded as a reduction in selling and administrative costs in 2002.
A member of our Board of Managers owns a minority interest in a firm
that provides information technology services to the company. Total amounts paid
us to the firm during 2000, 2001 and 2002 were $344,000 $532,000 and $407,000
respectively.
In August 2001, QCI entered into an agreement to affiliate the
facilities in Bridgeport, NJ with a director/ shareholder. The director/
shareholder has been operating this location under the affiliate program. The
aggregate 2002 revenue for those operations was $8.8 million. As of December 31,
2002, $0.1 million was owed to us in connection with this affiliate operation.
Pursuant to a Put and Call agreement dated December 14, 2001 between
Apollo and our senior lenders, the administrative agent under our credit
agreement, at the request of any of the Tranche D participating banks (as
defined in our credit agreement) and after certain triggering events, Apollo is
required to purchase all the Tranche D term loans held by such Tranche D banks.
In addition, Apollo has the right, in its sole discretion, to purchase all or
any part of the Tranche D term loans from the Tranche D banks at any time.
In 2002, we entered into several transactions with Apollo and
management in connection with the Exchange Offer. On April 10, 2002, QDI Inc.
entered into lock-up agreements with each of Apollo and certain members of our
management concerning the terms pursuant to which they agreed to exchange their
$30.5 million principal amount of QDI Notes depending on the outcome of the
Exchange Offer. As a result of the successful consummation of the Exchange Offer
on May 30, 2002 and pursuant to the terms of the lock-up agreements, we were not
required to issue any of our securities to Apollo or management in exchange for
their QDI Notes. However, as discussed elsewhere in this report, on May 30, 2002
we issued approximately $54.5 million principal amount of New Notes to the
holders of the QDI Notes that participated in the Exchange Offer and to Ares,
who had also executed a lock-up agreement with QDI on April 10, 2002. For a
discussion of the Exchange Offer, see Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
For a description of certain employment agreements and other agreements
with management and security holders, see Item 11. "Executive Compensation".
35
Item 14. CONTROLS AND PROCEDURES.
We maintain a set of disclosure controls and procedures that are
designed to ensure that Information required to be disclosed by us in the
reports filed by us under the Securities Exchange Act of 1934, as amended
("Exchange Act"), is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms. Within the 90 days prior to
the filing date of this report, we carried out an evaluation, under the
supervision and with the participation of our management, including the
President and Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Exchange Act. Based on that
evaluation, our President and Chief Executive Officer and the Chief Financial
Officer concluded that our disclosure controls and procedures are effective.
Our management, including our President and Chief Executive Officer and
our Chief Financial Officer, does not expect that our disclosure controls and
procedures, including our internal controls and procedures for financial
reporting, will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within our company have been detected. These inherent limitations
include the realities that judgments in decision making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
There have been no significant changes in our internal controls or
other factors that could significantly affect those controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
36
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The documents filed as part of this report are as follows:
1. Financial Statements Listed On The Table of Contents Below
2. Financial Statement Schedules
All consolidated financial statement schedules are omitted because they
are inapplicable, not required or the information is included elsewhere
in the consolidated financial statements or the notes thereto.
(b) Exhibits required by Item 601 of Regulation S-K are submitted as a
separate section herein immediately following the "Exhibit Index".
(c) Reports on Form 8-K filed in the fourth quarter of 2002.:
NONE
QUALITY DISTRIBUTION, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------
PAGE(S)
Report of Independent Certified Public Accountants
for the three years ended December 31, 2002 2
Consolidated Balance Sheets as of December 31, 2001 and 2002 3
Consolidated Statements of Operations for the years ended
December 31, 2000, 2001 and 2002 4
Consolidated Statements of Membership Interest and Comprehensive Loss
for the years ended December 31, 2000, 2001 and 2002 5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 2001 and 2002 6 - 7
Notes to Consolidated Financial Statements 8 - 35
1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Membership Unit Holders of
Quality Distribution, LLC:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of membership interest and comprehensive
loss and of cash flows present fairly, in all material respects, the financial
position of Quality Distribution, LLC (successor to Quality Distribution, Inc.)
and its subsidiaries at December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 3 to the financial statements, the Company adopted
Statement of Financial Accounting Standards (FASB Statement) No. 142 "Goodwill
and Other Intangible Assets," on January 1, 2002.
As discussed in Note 1, the Company restated the financial statements as of and
for the year ended December 31, 2001.
/s/ PRICEWATERHOUSECOOPERS LLP
______________________________
PricewaterhouseCoopers LLP
Tampa, Florida
April 9, 2003
2
QUALITY DISTRIBUTION, LLC, SUCCESSOR TO QUALITY DISTRIBUTION, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2002
(in 000'S) EXCEPT MEMBERSHIP INTEREST AND PER SHARE DATA
- -------------------------------------------------------------------------
2001 2002
(RESTATED)
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 2,212 $ 661
Accounts receivable, net 85,147 75,428
Current maturities of other receivables 891 991
Inventories 1,143 898
Prepaid expenses 5,767 5,186
Prepaid tires 8,968 7,894
Income tax recoverable 306 --
Other 1,775 1,587
--------- ---------
Total current assets 106,209 92,645
Property and equipment, net 177,359 153,561
Goodwill and intangibles, net 152,775 132,317
Other assets 11,795 8,742
--------- ---------
$ 448,138 387,265
========= =========
LIABILITIES AND MEMBERSHIP INTEREST
Current liabilities:
Current maturities of indebtedness $ 2,677 $ 3,251
Accounts payable 13,417 13,356
Affiliates and independent owner-operators payable 4,930 10,604
Accrued expenses 49,551 44,248
Income taxes payable 1,092 1,569
--------- ---------
Total current liabilities 71,667 73,028
Long-term indebtedness, less current maturities 441,179 378,939
Environmental liabilities 36,163 27,324
Other non-current liabilities 13,744 17,656
Deferred tax liability 1,270 1,361
--------- ---------
Total liabilities 564,023 498,308
--------- ---------
Mandatorily redeemable common stock (30 shares) 1,210 --
Mandatorily redeemable preferred stock 16,499 --
Minority interest in subsidiary 1,833 1,833
Commitments and contingencies (Notes 12 and 13)
MEMBERSHIP INTEREST
Membership interest, no par value, 1,000 authorized, 100 issued at December 31, 2002
Common stock, $.01 par value; 15,000 shares authorized and issued at December 31, 2001 20 --
Additional paid-in capital 105,544 176,436
Treasury stock (402) --
Accumulated deficit (38,395) (83,892)
Stock recapitalization (189,589) (189,589)
Accumulated other comprehensive loss (10,829) (15,831)
Notes receivable (1,776) --
--------- ---------
Total membership interest (135,427) (112,876)
--------- ---------
$ 448,138 $ 387,265
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
3
QUALITY DISTRIBUTION, LLC, SUCCESSOR TO QUALITY DISTRIBUTION, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN 000'S)
2000 2001 2002
(RESTATED)
---------- ---------- ----------
OPERATING REVENUES:
Transportation $ 488,835 $ 444,816 $ 447,898
Other 67,712 65,885 68,640
---------- ---------- ----------
Total operating revenues 556,547 510,701 516,538
OPERATING EXPENSES:
Purchased transportation 320,943 298,688 301,921
Compensation 73,076 66,978 69,104
Fuel, supplies and maintenance 46,440 42,426 43,234
Depreciation and amortization 35,281 33,410 31,823
Selling and administrative 17,570 13,743 13,575
Insurance claims 11,148 11,656 13,320
Taxes and licenses 4,701 4,197 4,231
Communication and utilities 8,316 7,736 7,479
(Gain) loss on sale of property and equipment (457) 99 486
CLC expenses 6,740 2,400 2,278
Restructuring charges 3,195 1,049 1,804
---------- ---------- ----------
Total operating expenses 526,953 482,382 489,255
---------- ---------- ----------
Net operating income 29,594 28,319 27,283
Interest expense, net (40,236) (40,224) (33,132)
Interest expense, transaction fees (10,077)
Other income (expense) 24 (22) (126)
---------- ---------- ----------
Loss before income taxes (10,618) (11,927) (16,052)
Provision for income taxes 31,225 1,135 1,443
---------- ---------- ----------
Net loss from continuing operations (41,843) (13,062) (17,495)
---------- ---------- ----------
Discontinued Operations:
Income (loss) from operations of discontinued
divisions, net of tax 56 (359) (1,386)
Loss on disposal of discontinued divisions
net of tax -- -- (1,527)
---------- ---------- ----------
Net loss before cumulative effect of change in accounting principle (41,787) (13,421) (20,408)
Cumulative effect of change in accounting principle -- -- (23,985)
---------- ---------- ----------
Net (loss) (41,787) (13,421) (44,393)
Preferred stock dividends and accretions (1,745) (2,762) (1,104)
---------- ---------- ----------
Net loss attributable to members interest $ (43,532) $ (16,183) $ (45,497)
========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
QUALITY DISTRIBUTION LLC, SUCCESSOR TO QUALITY DISTRIBUTION, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERSHIP INTEREST
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN 000'S)
Accumulated
Additional Stock Other Stock Total
Comprehensive Common Treasury Paid-in- Accumulated Recapital Comprehensive Subscription Membership
(Loss) Stock Stock capital Deficit ization Loss Receivable Interest
---------------------------------------------------------------------------------------------------------
Balance December 31, 1999 -- $ 20 $ -- $ 104,915 $ 21,320 $(189,589) $ (177) $ (1,262) $ (64,773)
Net loss $ (41,787) (41,787) (41,787)
Issuance of common
stock, net 741 741
Issuance of stock
subscription (624) (624)
Acquisition of treasury
stock (32) (32)
Preferred stock
accretion (1,444) (1,444)
Minority stock dividend (301) (301)
Translation adjustment (574) (574) (574)
Pension plan minimum
liability (2,072) (2,072) (2,072)
---------------------------------------------------------------------------------------------------------
Balance December 31, 2000 $ (44,433) 20 (32) 105,656 (22,212) (189,589) (2,823) (1,886) (110,866)
==========
Net Loss (Restated) $ (13,421) (13,421) (13,421)
Issuance of common
stock, net (112) (112)
Stock subscription
receipts 110 110
Acquisition of treasury
stock (370) (370)
Preferred stock
accretion (2,617) (2,617)
Minority stock dividend (145) (145)
Translation adjustment (336) (336) (336)
Change in value of
derivatives (3,346) (3,346) (3,346)
Pension plan minimum
liability (4,324) (4,324) (4,324)
---------------------------------------------------------------------------------------------------------
Balance December 31, 2001
(Restated) $ (21,427) 20 (402) 105,544 (38,395) (189,589) (10,829) (1,776) (135,427)
===========
Net Loss $ (44,393) (44,393) (44,393)
Issuance of stock
subscription (200) (200)
Acquisition of treasury
stock (834) (834)
Preferred stock
accretion (959) (959)
Minority stock dividend (145) (145)
Translation adjustment (441) (441) (441)
Change in value of
derivatives 3,346 3,346 3,346
Pension plan minimum
liability (7,907) (7,907) (7,907)
Formation of QDI LLC
(see note 2):
Common stock (20) 20 --
Stock subscription (1,976) 1,976 --
Treasury stock 1,236 (1,236) --
Junior PIK notes 14,830 14,830
Stock warrants 86 86
Redeemable common stock 1,209 1,209
Preferred stock 57,959 57,959
---------------------------------------------------------------------------------------------------------
Balance December 31,
2002 $ (49,395) $ -- $ -- $ 176,436 $ (83,892) $(189,589) $ (15,831) $ -- $(112,876)
=========================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
5
QUALITY DISTRIBUTION, LLC, SUCCESSOR TO QUALITY DISTRIBUTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN 000'S,)
2000 2001 2002
(RESTATED)
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(41,787) $(13,421) $(44,393)
Adjustments to reconcile to net cash and cash
equivalents provided by operating activities:
Deferred income taxes 30,523 88 90
Depreciation and amortization 37,044 35,125 31,823
Cumulative effect of change in accounting principle 23,985
(Gain) loss on sale of property and equipment (457) 101 2,049
Accretion of interest on debt discount (1,149)
Writeoff/amortization of deferred financing costs 10,481
Paid-in-kind interest on New Notes 1,546
Changes in assets and liabilities:
(Increase) decrease in accounts and other receivable 35,105 5,304 9,620
(Increase) decrease in inventories (23) 643 245
(Increase) decrease in prepaid expenses 3,662 1,624 581
(Increase) decrease in prepaid tires 1,123 (811) 1,074
(Increase) decrease in other assets 1,978 (3,569) (2,061)
(Decrease) in accounts payable and
accrued expenses (8,926) (5,768) (10,607)
Increase (decrease) in affiliates and independent
owner-operators payable (629) (2,633) 5,674
Increase (decrease) in other liabilities (16,315) (9,516) (3,912)
Change in current income taxes (16) 301 786
-------- -------- --------
Net cash and cash equivalents provided by
operating activities 41,282 7,468 25,832
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (23,079) (37,412) (15,286)
Proceeds from sales of property and equipment 4,358 2,476 8,117
Net cash and cash equivalents used in investing ________ ________ ________
activities (18,721) (34,936) (7,169)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance (payments on) long-term debt, net 45,000 (4,500)
Capital contribution 10,000
Principal payments on long-term debt and capital lease
obligations (17,218) (18,083) (12,984)
Amendment fees (5,501)
Increase (decrease) in bank overdraft (3,090) 3,461 (5,836)
Preferred stock redemption (2,600)
Other stock transactions 438 (370) (1,032)
Cash dividends (301) (145) (145)
________ ________ ________
Net cash and cash equivalents provided by (used in)
financing activities (20,171) 27,263 (19,998)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents 2,390 (205) (1,335)
Translation adjustment (804) (219) (216)
Cash and cash equivalents, beginning of year 1,050 2,636 2,212
-------- -------- --------
Cash and cash equivalents, end of year $ 2,636 $ 2,212 $ 661
======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
================================================================================
QUALITY DISTRIBUTION LLC, SUCCESSOR TO QUALITY DISTRIBUTION INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN 000'S)
2000 2001 2002
(RESTATED)
---------- ---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 39,412 $ 33,914 $ 32,079
========== ========== ==========
Income taxes $ 637 $ 354 $ 129
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Accretion of dividends on preferred stock $ 1,444 $ 2,617 $ 959
========== ========== ==========
Exchange Offer reduction in debt $ 45,415
==========
Original capital lease obligation $ 881
==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
7
QUALITY DISTRIBUTION, LLC
(SUCCESSOR TO QUALITY DISTRIBUTION, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
1. BUSINESS ORGANIZATION
Quality Distribution, LLC (the "Company" or "QD LLC") is a Delaware
limited liability company formed on April 14, 2002. Our sole member is Quality
Distribution, Inc. ("QDI Inc."), a Florida corporation. On May 30, 2002, QDI
Inc. completed an exchange offer for its public debt, at which time QDI Inc.
transferred substantially all of its assets and liabilities (other than certain
contract rights which by their terms cannot be assigned without the consent of
the other parties thereto) to the Company, consisting principally of the capital
stock of QDI Inc.'s operating subsidiaries. As a result, QDI Inc. has no
significant assets or operations other than the ownership of 100% of QD LLC's
membership units. The Company became the successor entity to QDI Inc. The
transfer of the net assets to the Company by QDI Inc. has been accounted for as
a transaction between companies under common control. As a result, QDI Inc.'s
historical accounting basis for the net assets has been carried over to the
Company. The results of operations for periods prior to the transfer represent
the historical operating results for QDI Inc.
QD LLC and its subsidiaries are engaged primarily in truckload
transportation of bulk chemicals in North America. The Company conducts a
significant portion of its business through a network of company terminals,
affiliates and independent owner-operators. Affiliates are independent
companies, which enter into renewable one-year contracts with the Company.
Affiliates are responsible for paying for their own power equipment (including
debt service), fuel and other operating costs. Affiliates lease trailers from
the Company. Owner-operators are independent contractors, who, through a
contract with the Company, supply one or more tractors and drivers for the
Company's use. Contracts with owner-operators may be terminated by either party
on short notice. The Company also charges affiliates and third parties for the
use of tractors and trailers as necessary. In exchange for the services
rendered, affiliates and owner-operators are generally paid a percentage of the
revenues generated for each load hauled.
Historical financial information contained herein has been adjusted to
reflect the sale of the discontinued operations, consisting of the Canadian
petroleum division and the internet load brokerage subsidiary of QD LLC, in the
second quarter of 2002.
On April 10, 2002, QDI Inc. and its subsidiaries pursuant to the terms
of an Offering Memorandum and Consent Solicitation Statement (The "Exchange
Offer"), commenced an offer to exchange up to $87.0 million principal amount of
QDI Inc.'s outstanding 10% Series B Senior Subordinated Notes due 2006 and
Series B Floating Interest Rate Subordinated Term Securities due 2006 (FIRSTSSM)
the ("QDI Notes") for a combination of certain debt and equity securities. See
Footnote 8 LONG TERM INDEBTEDNESS for a detailed discussion.
Following the exchange offer, QDI Inc. had $56.5 million of its 13.75%
preferred stock outstanding, $1.2 million of redeemable common stock and issued
$14.8 million of 12% Junior Subordinated Pay-in-Kind Notes ("Junior PIK Notes")
due 2009. QDI Inc. has no assets and no operations other than its investment in
QD LLC and can only repay it's obligations through the cash flows of the
Company. The 12% Junior Subordinated Pay-in-Kind notes bear interest at a rate
of 12% per annum, of which 11% is payable in kind in the form of additional
pay-in-kind notes, and 1% is payable in cash. Interest is payable on June 15 and
December 15 commencing June 15, 2002 and ending on June 15, 2009. The annual
cash interest payments range from $120 thousand in 2002 to $250 thousand in
2008,with the original principal amount issued and pay-in-kind interest of $26.8
million in the aggregate due on June 15, 2009.
The 13.75% preferred stock accrues dividends and accumulates to the
extent they are not paid in cash. All shares and all unpaid accrued dividends
are mandatorily redeemable, subject to certain restrictions, on September 15,
2006. At that time, the total amount of the liquidation amount and accrued and
unpaid dividends, assuming no prior dividend payments, will be $105.3 million.
QDI Inc. has 15.0 million shares of $.01 par value common stock
authorized. At December 31, 2002 QDI Inc. had 2.0 million shares of common stock
issued and outstanding. Additionally, QDI Inc. has 30 thousand shares of
redeemable common stock valued at $1.2 million. Pursuant to the terms of the
shareholders agreement, the holder can request redemption any time after June 9,
2002 at the fair market value of the stock on the date of redemption, with fair
market value determined in accordance with the terms of the shareholders
agreement.
Payment for the above securities issued by QDI Inc. are expected to be
made from dividends paid to QDI Inc. by QD LLC. QD LLC is generally restricted
from making dividend payments to QDI Inc. pursuant to the
8
terms of the indenture governing the 12 1/2% Senior Subordinated Secured Notes
due 2008 and the credit agreement. In particular, with respect to the redeemable
common stock, the credit agreement would prohibit QD LLC from paying dividends
to QDI Inc. to enable QDI Inc. to redeem the redeemable common stock unless the
holder is no longer an employee of QDI Inc. or the lenders consent to such
payment. In the event of a default by QDI Inc., these security holders of QDI
Inc. would have no direct recourse against QD LLC.
Restatement of 2001
- -------------------
The consolidated financial statements as of and for the year ended
December 31, 2001 have been restated to reflect corrections of a clerical error
in recording revenues and establishing a reserve for incurred but not reported
insurance losses relating to a subsidiary that markets insurance products. These
corrections resulted in an increase in net loss of approximately $1 million, an
increase of claims loss reserves of $0.1 million and reduction in long term
receivables of $0.9 million.
In addition, we reclassified our insurance subsidiary's premium revenue
and insurance loss expenses to a gross basis versus a net basis for 2000 and
2001. The impact of those reclassifications increased both other revenue and
insurance claims expense by $3.1 million and $2.4 million for 2000 and 2001,
respectively.
All financial data in this Form 10-K reflects the impact of the
restatement. The following table summarizes the impact of the corrections to
the statement of operations and balance sheet as of and for the year ended
December 31, 2001 (in thousands):
Statement of Operations Data:
For the year ended December 31, 2001
---------------------------------------------------------------
Reclass for
As Discontinued
reported Restatement Reclassification Operations Restated
--------- ----------- ---------------- ------------ ---------
Other revenue $ 63,719 $ $ 2,380 $ (214) $ 65,885
Total operating revenue 523,337 2,380 (15,016) 510,701
Insurance claims expenses 8,590 960 2,380 (274) 11,656
Total operating expenses 494,417 960 2,380 (15,375) 482,382
Net operating income 28,920 (960) 359 28,319
Loss before income taxes (11,326) (960) 359 (11,927)
Net loss (12,461) (960) -- (13,421)
Balance Sheet Data:
As of December 31, 2001
--------------------------
As reported Restated
----------- ----------
Other assets $ 8,881 $ 8,041
Total assets 448,978 448,138
Accrued expenses 49,431 49,551
Total current liabilities 71,547 71,667
Total liabilities 563,903 564,023
Accumulated deficit (37,435) (38,395)
Total membership interest (134,467) (135,427)
Total liabilities and membership interest 448,978 448,138
Historical financial information contained herein has been adjusted to
reflect the discontinued operations resulting from the sale of certain
non-guarantor subsidiaries' assets in the second quarter 2002. These
subsidiaries consisted of the petroleum division and mining operation of Levy,
and the internet load brokerage subsidiary of the Company (Bulknet).
The operations and asset disposition information of the discontinued
divisions are as follows: (in thousands)
YEAR ENDED
DECEMBER 31,
------------------------------------------
2000 2001 2002
-------- --------- --------
Revenue $ 17,347 $ 15,015 $ 5,117
Operating expenses 17,291 15,374 6,503
-------- -------- --------
Operating income (loss) $ 56 $ (359) $ (1,386)
======== ======== ========
The loss on disposal of these divisions during fiscal year 2002 is as
follows: (in thousands)
Carrying value of assets sold in 2002:
Petroleum Division $ 5,450
Bulknet 392
Proceeds (4,315)
--------
Loss on disposal $ 1,527
========
2. LIQUIDITY
Our credit agreements include financial covenants which were modified
December 14, 2001 as part of an amendment (the "Fourth Amendment") thereto. The
new financial covenants were less restrictive than the original covenants and
remained in effect for four consecutive calendar quarters ending December 31,
2002. On April 5, 2002, we entered into a fifth amendment (the "Fifth
Amendment") to our credit agreement. The Fifth Amendment further amended the
financial covenants through the date of the final maturity of our credit
agreement. Such revised covenants will be less restrictive than the previously
existing covenants for the period ending March 31, 2003 through final maturity
of our credit agreement.
On April 10, 2002, QDI Inc. and its subsidiaries pursuant to the terms
of an Offering Memorandum and Consent Solicitation Statement, commenced an offer
to exchange up to $87.0 million principal amount of QDI Inc.'s outstanding 10%
Series B Senior Subordinated Notes due 2006 and Series B Floating Interest Rate
Subordinated Term Securities due 2006 (FIRSTSSM) (the "QDI Notes") for a
combination of certain debt and equity securities. See Footnote 8 LONG TERM
INDEBTEDNESS for a detailed discussion.
9
3. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of QD LLC
and its subsidiaries. All significant inter-company accounts and transactions
have been eliminated in consolidation. Minority interest reflects outstanding
preferred stock of Chemical Leaman Corp. ("CLC")
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less to be cash equivalents. Bank overdrafts are included in
accrued expenses.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market and consist primarily of tires, parts, fuel and supplies for
servicing the Company's revenue equipment.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Tractors and trailers
under capital leases are stated at the present value of the minimum lease
payments at the inception of the lease. Depreciation, including amortization of
tractors and trailers under capital leases, is computed on a straight-line basis
over the estimated useful lives of the assets or the lease terms, whichever is
shorter, to an estimated salvage value. The estimated useful lives are 10-25
years for buildings and improvements, 5-15 years for tractors and trailers, 7
years for terminal equipment, 3-5 years for furniture and fixtures, and 3-10
years for other equipment. Maintenance and repairs are charged to operating
expense when incurred. Major improvements that extend the lives of the assets
are capitalized. The Company assesses whether there has been an impairment of
long-lived assets and certain intangibles in accordance with FAS 144 "Accounting
for the Impairment and Disposal of Long-Lived Assets." If the carrying value of
an asset, including associated intangibles, exceeds the sum of estimated
undiscounted future cash flows, then an impairment loss is recognized for the
difference between estimated fair value and
10
carrying value. When assets are disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any gains or losses are
reflected in operating expenses.
GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted the provisions of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(Statement 142). As a result of the adoption of Statement 142, the amortization
of goodwill ceased, resulting in a decrease in net loss of $3.9 million for the
year ended December 31, 2002. Under Statement 142, goodwill is subject to an
annual impairment test which we completed in 2002. During our initial impairment
analysis of goodwill the Company determined that approximately $4.6 million of
goodwill had been classified as an offset against accounts payable and accrued
expenses. These amounts have been reclassified into goodwill.
As a result of our initial impairment test an impairment adjustment of
$24.0 million was charged to earnings as a cumulative effect of a change in
accounting principle at January 1, 2002. There were several factors that led to
the conclusion that an impairment charge was warranted. These factors included
several consecutive years of declining revenues and operating losses, an
uncertain economic environment exacerbated by the events of September 11, 2001,
increased insurance costs for the foreseeable future and the highly leveraged
nature of the Company. No tax benefit was recorded in connection with this
charge. The fair value of the reporting unit was determined based on a
combination of prices of comparable businesses and present value techniques.
The changes in the carrying amount of goodwill for the year ended
December 31, 2002 are as follows: (in thousands)
Beginning Balance $150,495
Write-off related to sale of business unit (358)
Reclassification 4,580
Impairment Losses (23,985)
--------
Ending Balance $130,732
========
Intangible assets consist mainly of non-compete agreements and a
pension plan related intangible asset with lives ranging from 1-14 years.
Accumulated amortization of intangible assets was $2.0 million and $1.4 million
at December 31, 2002 and 2001, respectively. The gross amount of intangible
assets at December 31, 2002 and 2001 was $3.5 million.
Amortization expense for the year ended December 31, 2000, 2001 and
2002 was $2.8 million, $2.9 million and $0.7 million. Remaining intangible
assets will be amortized to expense as follows (in thousands):
2003 $335
2004 94
2005 94
2006 94
2007 and after 886
The following table presents net loss on a comparable basis, after
adjustment for goodwill amortization. (in thousands):
Year ended
--------------------------------
DECEMBER 31, DECEMBER 31,
2000 2001
-------------- ------------
Net loss:
As reported $ (41,787) $(13,421)
Goodwill
amortization 3,919 3,919
Impairment loss
FAS 142 -- --
---------- --------
Adjusted net loss $ (37,868) $ (9,502)
========== ========
11
In connection with the completion of the initial impairment test, We
have restated our consolidated statements of operations for the quarterly period
ended March 31, 2002. The following table presents the restated net loss:
(in thousands)
THREE MONTHS ENDED
MARCH 31,
2002
------------------
Net loss:
As reported $ (3,045)
Cumulative effect of a change in accounting
principle (23,985)
--------
As restated $(27,030)
========
INCENTIVE STOCK OPTION PLAN
The Company uses Accounting Principles Board Opinion No. 25,
"Accounting for Stock-Based Compensation," and the related interpretations to
account for an employee stock option plan ("The Plan"). No compensation cost has
been recognized under the Plan, as the option price has been greater than or
equal to the market price of the common stock on the applicable measurement date
for all options issued. The Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), for disclosure purposes in 1996.
STOCK OPTION PLAN
The Company's parent QDI, Inc. adopted The Plan pursuant to which a
total of 222,000 shares of QDI, Inc.'s common stock will be available for grant.
Fifty percent of each new option granted vests in equal increments over four
years. The remaining fifty percent of each new option will vest in nine years,
subject to acceleration if certain per-share equity value targets are achieved
or, in the event of a sale of the Company. Vesting of the new options occurs
only during an employee's term of employment. The new options will become fully
vested in the event of a termination of employment without "cause" or for "good
reason" within six months following a sale of the Company.
The stock of QDI, Inc. is no longer traded publicly. The pro forma
fair value of options granted during 2000 and 2001 are based upon a model using
a risk free rate of 5.76% for 2000 and 4.86% for 2001 for options with an
expected life of 10 years. The pro forma fair value of stock options granted in
2000 is $1,049,000 and 2001 is $96,000. No options were granted in 2002. In
October 2002 members of senior management forfeited 106,000 options previously
granted. At December 31, 2002, a total of 162,900 authorized shares remain
available for granting.
Had compensation cost relating to the Plans been determined based upon
the fair value at the grant date for awards under the Plans consistent with the
method described in SFAS 123, the Company's net income (loss) and earnings
(loss) per share common would have been as follows for the years ended December
31:
2000 2001 2002
----------- --------- ---------
Net income (loss) attributable to common stockholders/
members interest (in thousands)
As reported $ (43,532) $ (16,183) $ (45,497)
Pro forma $ (43,918) $ (16,629) $ (45,815)
Earnings (loss) per common share:
As reported $ (21.59) $ (8.04) $ N/A
Pro forma $ (21.78) $ (8.26) $ N/A
12
Stock option activity for the years ended December 31, 2000, 2001 and
2002 is as follows: (in thousands, except per share data)
RANGE OF AVERAGE
NUMBER OF OPTION EXERCISE SHARES EXPIRATION
SHARES PRICES PRICE VESTED DATE
--------- -------- -------- ------ ----------
Options outstanding at December 31, 1999 202 $ 40.00 $ 40.00 23 2008-2009
---- ----
2000 option activity:
Granted 61 $ 40.00 $ 40.00 - 2010
Vesting of prior-year options - $ 40.00 $ 40.00 31 2008-2009
Canceled (55) $ 40.00 $ 40.00 (13) 2008-2010
---- ----
Options outstanding at December 31, 2000 208 $ 40.00 $ 40.00 41 2008-2010
---- ----
2001 option activity:
Granted 6 $ 40.00 $ 40.00 - 2011
Vesting of prior-year options - $ 40.00 $ 40.00 25 2008-2010
Canceled (15) $ 40.00 $ 40.00 (6) 2008-2011
---- ----
Options outstanding at December 31, 2001 199 $ 40.00 $ 40.00 60 2008-2011
2002 option activity:
Granted - - - - 2008-2009
Vesting of prior-year options - $ 40.00 $ 40.00 21 2008-2009
Canceled (140) $ 40.00 $ 40.00 (49) 2008-2010
---- ----
Options outstanding at December 31, 2002 59 32
==== ====
OTHER ASSETS
As of December 31, 2002, deferred loan costs of approximately
$3,167,000 are being amortized over 3 to 4 years which represent the remaining
lives of the related long-term debt or credit amendments. As of December 31,
2001, $7,316,000 of deferred loan costs remained. Certain portions of these
costs were expensed as part of the Fifth Amendment and the Exchange Offer in
May, 2002.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to the
current year presentation.
ACCRUED LOSS, DAMAGE AND ENVIRONMENTAL CLAIMS
Through September 14, 2001, the Company maintained liability insurance
for bodily injury and property damage with no deductible. From September 15,
2001 to September 14, 2002, liability insurance for bodily injury and property
damage was covered in the amount of $75.0 million per incident, with a $2.0
million deductible. There was no aggregate limit on this coverage. As of
September 15, 2002, liability insurance for bodily injury and property damage is
covered in the amount of $55.0 million per incident, with a $5.0 million per
incident deductible. There is no aggregate limit on this coverage. The Company
currently maintains workers' compensation insurance coverage with a $1.0 million
deductible. The Company has accrued for the estimated self-insured portion of
bodily injury, property damage and workmen's compensation claims including
losses incurred but not reported.
The Company is self-insured for damage or loss to the equipment it owns
or leases and for any cargo losses. The Company has accrued for the estimated
cost of claims reported and losses incurred but not reported.
The Company transports chemicals and hazardous materials and operates
tank wash facilities. As such, the Company's operations are subject to various
environmental laws and regulations. The Company has been involved in various
litigation and environmental matters arising from these operations. Reserves
have been recognized for probable losses that can be reasonably estimated.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying balance sheets for
cash, accounts receivable, and accounts payable approximate fair value because
of the immediate or short-term maturities of these financial instruments.
The fair value of the Company's debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities. The fair value of the
Company's Series B senior fixed rate subordinated notes is approximately $9.3
million at December 31, 2002. The fair value of the Company's Series B floating
interest rate subordinated term notes is approximately $3.5 million at December
31, 2002. The fair value of the Company's 12.5% senior subordinated secured
notes is approximately $16.4 million at December 31, 2002. The book value of the
Company's remaining variable rate debt approximates fair market value at
December 31, 2002. The fair value of derivative financial instruments at
December 31, 2001 resulted in a liability of $3.3 million. There were no
outstanding derivative financial instruments at the end of 2002.
13
REVENUE RECOGNITION
Transportation revenues and related costs are recognized on the date
freight is delivered. Other operating revenues, consisting primarily of lease
revenues from affiliates, owner-operators and third parties, are recognized as
earned. Tank wash revenues are recognized when the wash is performed.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The translation from Canadian dollars to U.S. dollars is performed for
balance sheet accounts using current exchange rates in effect at the balance
sheet date and for revenue and expense accounts using a weighted average
exchange rate in effect during the period. The gains or losses, net of income
taxes, resulting from such translation are included in membership interest as a
component of accumulated other comprehensive loss. Gains or losses from foreign
currency transactions are included in other income (expense).
The components of accumulated other comprehensive loss are as follows:
(in thousands)
December 31, December 31,
2001 2002
------------ ------------
Pension plan minimum liability $ 6,494 $ 14,401
Derivative fair value adjustment 3,346 --
Foreign currency translation adjustment 989 1,430
------------ ------------
$ 10,829 $ 15,831
============ ============
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
basis. Deferred tax assets also are recognized for credit carryforwards.
Deferred tax assets and liabilities are measured using the enacted rates
applicable to taxable income in the years in which the temporary differences are
expected to reverse. The effect on deferred tax assets and liabilities of the
change in tax rates is recognized in income in the period that includes the
enactment date. An assessment is made as to whether or not a valuation allowance
is required to offset deferred tax assets.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued FAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which is effective for exit or
disposal activities initiated after December 31, 2002. Management anticipates
the adoption of FAS No. 146 will not materially affect the Company's current
financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation ("FIN") 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantee of Indebtedness of Others. FIN 45 requires that upon issuance
of a guarantee, the guarantor must recognize a liability for the fair value of
the obligation it assumes under that guarantee. FIN 45's provisions for initial
recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002, The guarantor's previous
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the interpretation. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. The Company is not a guarantor under
any significant guarantees and thus this interpretation is not expected to have
a significant effect on the Company's financial position or results of
operations.
On December 31, 2002, the FASB issued FAS No. 148, Accounting for
Stock-based Compensation--Transition and Disclosure--an amendment of FAS 123,
Accounting For Stock-Based Compensation. FAS 148 does not change the provisions
of FAS 123 that permit entities to continue to apply the intrinsic value method
of APB 25, Accounting for Stock Issued to Employees. FAS 148 does require
certain new disclosures in both annual and interim financial statements. The
required annual disclosures were effective immediately for the Company. The new
interim disclosure provisions will be effective for the Company in the first
calendar quarter of 2003.
On January 17, 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities, An Interpretation of Accounting Research Bulletin No. 51. The
primary objectives of FIN 46 are to provide
14
guidance on how to identify entities for which control is achieved through means
other than through voting rights (variable interest entities "VIE" and how to
determine when and which business enterprise should consolidate the VIE. This
new model for consolidation applies to an entity in which either (1) the equity
investors do not have a controlling financial interest or (2) the equity
investment at risk is insufficient to finance that entity's activities without
receiving additional subordinated financial support from other parties. The
Company does not expect the adoption of this standard to have any impact on the
financial position and results of operations.
4. DERIVATIVES
We utilize derivative financial instruments to reduce our exposure to
market risk from changes in interest rates and foreign exchange rates. The
instruments primarily used to mitigate these risks are interest rate swaps and
foreign exchange contacts. All derivative instruments held by us are designated
as hedges and, accordingly, the gains and losses from changes in derivative fair
values are recognized as comprehensive income as required by Statement of
Financial Accounting Standards No 133, Accounting For Derivative Instruments and
Hedging Activities ("SFAS133"). Gains and losses upon settlement are recognized
in the statement of operations or recorded as part of the underlying asset or
liability as appropriate. We are exposed to credit related losses in the event
of nonperformance by counter parties to these financial instruments; however,
counter parties to these agreements are major financial institutions; and the
risk of loss due to nonperformance is considered by management to be minimal. We
do not hold or issue interest rate swaps or foreign exchange contracts for
trading purposes.
We had approximately $344 million of variable interest debt outstanding
at the end of 2001. We entered into interest rate swap agreements designated as
a partial hedge of our portfolio of variable rate debt. The purpose of these
swaps was to fix interest rates on variable rate debt and reduce certain
exposures to interest rate fluctuation.
On February 26, 2001, we entered into swap agreements on $30 million
and $100 million of our variable interest rate debt. The Company paid counter
parties interest at fixed rates of 4.96% and 5.155%. The latter is retroactive
to January 1, 2001. Counter parties paid the Company interest at a variable rate
equal to LIBOR. These agreements matured and renewed every three months and
terminated on August 1, 2002 and July 2, 2002, respectively.
On March 21, 2001, we entered into a swap agreement on $30 million of
our variable interest rate debt. The Company paid counter parties interest at a
fixed rate of 4.765%. Counter parties paid the Company interest at a variable
rate equal to LIBOR. This agreement matured and renewed every three months and
terminated September 22, 2002.
At December 31, 2001, we had interest rate swaps with a notional amount
of $160 million. The notional amount does not represent a measure of exposure of
the Company. At December 31, 2002 we had no active swap agreements.
At December 31, 2001, we entered into short-term foreign currency
agreements to exchange US dollars (US $0.3 million) for Canadian dollars (CN
$0.48 million). The purpose of these agreements was to hedge against
fluctuations in foreign currency exchange rates. We were required to make US
dollar payments at a 1.59% fixed exchange rate. The market risk based upon a 10%
fluctuation in the exchange rate was immaterial. At December 31, 2002 there were
no active foreign currency hedge agreements.
A reconciliation of current period changes in comprehensive income as
it relates to derivatives follows: (In thousands)
Year ended Year ended
12/31/01 12/31/02
---------- ----------
Balance beginning of period $ 337 $(3,346)
Current period declines in fair value (5,366) (231)
Reclassifications to earnings 1,683 3,577
--------- -------
Balance at end of period $ (3,346) $ --
======== =======
15
HEDGES OF FUTURE CASH FLOWS
The ineffective portion of changes in fair values of hedge positions
should be reported in earnings. All hedges were effective at December 31, 2001,
and as such, there were no earnings reclassifications at December 31, 2001 due
to ineffective hedges. There were no amounts excluded from the measure of
effectiveness in 2001 related to the hedge of future cash flows. As of December
31, 2002, there are no outstanding hedges.
5. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31: (in
thousands)
2001 2002
--------- ---------
Trade accounts receivable $ 85,245 $ 75,208
Affiliate and owner-operator receivables 4,981 3,812
Employee receivables 29 66
Other 4,164 4,188
--------- ---------
94,419 83,274
Less allowance for doubtful accounts (9,272) (7,846)
--------- ---------
$ 85,147 $ 75,428
========= =========
The activity in the allowance for doubtful accounts for each of the
three years ended December 31 is as follows (in thousands):
2000 2001 2002
------- ------- -------
Balance, beginning of period $ 6,438 $ 9,779 $ 9,272
Additions 4,295 1,732 6,429
Write-off of bad debts (954) (2,239) (7,855)
------- ------- -------
Balance, end of period $ 9,779 $ 9,272 $ 7,846
======= ======= =======
As of December 31, 2001 and 2002, approximately 85 percent of trade
accounts receivable were due from companies in the chemical and bulk food
products industries, respectively. For 2002, Dow Chemical Company accounted for
12.6% of the Company's operating revenues. In 2000 and 2001, the largest
customer accounted for approximately 7.5% and 12.5% of operating revenues,
respectively.
6. FIXED ASSETS
Property and equipment consisted of the following at December 31 (in
thousands):
2001 2002
--------- ---------
Land and improvements $ 13,180 $ 12,147
Buildings and improvements 21,420 22,363
Revenue equipment 278,435 259,706
Other equipment 35,652 46,465
Accumulated depreciation (171,328) (187,120)
--------- ---------
Property and equipment, net $ 177,359 $ 153,561
========= =========
Depreciation expense was $32,502,000, $30,489,000 and $31,150,000 for
the periods ending December 31, 2000, 2001 and 2002, respectively. The
capitalized cost of equipment under capital leases, which is included in
tractors and trailers in the accompanying consolidated balance sheets, was as
follows at December 31, 2002. We had no capitalized leases as of December 31,
2001.
Our capital leased equipment consists of the following at December 31,
2002 (in thousands):
2002
-------
Tractors and trailers $ 881
Less accumulated depreciation (28)
-------
$ 853
=======
16
At December 31, 2002, the capital lease obligations was $574 thousand and is
included in current maturities of indebtedness.
7. ACCRUED EXPENSES
Accrued expenses include the following at December 31 (in thousands):
2001 2002
(RESTATED)
------- -------
Bank overdraft $17,043 $11,207
Loss and damage claims 5,026 9,502
Environmental liabilities 6,409 5,662
Severance, relocation and integration 1,714 -
Salaries, wages and benefits 5,052 5,023
Restructure reserve 471 990
Accrued interest 5,693 4,076
Other 8,143 7,788
------- -------
$49,551 $44,248
======= =======
In connection with the acquisition of Chemical Leaman Corporation
("CLC") in 1998, $17.5 million of restructuring related costs was recorded as
part of purchase accounting. These costs included $14.0 million of severance,
bonuses and other termination-related costs to be incurred in connection with
identified staff reductions, $0.5 million costs in connection with the
disposition (closure) of certain facilities and $3.0 million of other costs.
During 2000 and continuing in 2001 and 2002, the Company initiated cost
cutting measures as part of a company-wide reorganization. The costs associated
with this reorganization include severed employees' wages and benefits. The
Company accrued $3.2 million in 2000, $1.1 million in 2001 and $1.8 million in
2002, respectively. In 2002 we eliminated approximately 70 employees. The
Company expects to finalize the termination of these employees in 2003. The
reconciliation of the activity is as follows: (in thousands)
2000 2001 2002
--------- -------- --------
Beginning Balance $ - $ 1,334 $ 471
Additions 3,200 1,049 1,804
Payments (1,866) (1,912) (1,285)
----------------------------------------------------
Ending Balance $ 1,334 $ 471 $ 990
====================================================
8. LONG-TERM INDEBTEDNESS
Long-term debt consisted of the following: (in thousands)
December 31 December 31
2001 2002
-------------------------------
Tranche A term loan, principal of $211 due quarterly with the balance
due in 2004 $81,586 $ 80,742
Tranche B term loan, principal of $247 due quarterly with the balance
due in 2005 95,184 94,196
Tranche C term loan, principal of $211 due quarterly with the
balance due in 2006 81,586 80,742
Tranche D term loan, balance due in 2006 15,000 5,000
Revolving credit facility, including sub-limit 30,500 26,000
--------------------------------
Total borrowings under credit agreement 303,856 286,680
12 1/2% senior subordinated secured notes due 2008 -- 56,080
Bond carrying value in excess of face value -- 13,256
Series B senior subordinated notes, principal due in 2006,interest payable
semi-annually at 10% per annum 88,000 18,100
Series B floating interest rate subordinated term notes, principal due in
2006,interest payable semi-annually at LIBOR plus 4.81% 21,500 7,500
17
Series B senior subordinated notes, principal due in 2006,interest payable
semi-annually at 10% per annum, owned by related parties 12,000 --
Series B floating interest rate subordinated term notes, principal due in
2006,interest payable semi-annually at LIBOR plus 4.81%,owned by
related parties 18,500 --
---------------------------------
Long-term debt, including current maturities 443,856 381,616
Less current maturities of long-term debt
(excluding capital lease obligations) (2,677) (2,677)
---------------------------------
Long-term debt, less current maturities $ 441,179 $ 378,939
=================================
QDI Inc. and its subsidiaries, pursuant to the terms of an Offering
Memorandum and Consent Solicitation Statement, dated as of April 10, 2002, as
supplemented May 10, 2002 by Supplement No. 1 thereto dated as of May 10, 2002
(as so supplemented, the "Offering Memorandum"):
- - commenced an offer to exchange up to $87.0 million principal amount of
QDI Inc.'s outstanding 10% Series B Senior Subordinated Notes due 2006
and Series B Floating Interest Rate Subordinated Term Securities due
2006 (FIRSTS) (together, the "QDI Notes") for a combination of certain
debt and equity securities, including the 12 1/2% Senior Subordinated
Secured Notes due 2008 of the Company (the "New Notes");
- - commenced a consent solicitation for certain proposed amendments to the
indenture governing the QDI Notes to eliminate many of the restrictive
covenants contained in that indenture; and
- - entered into lock-up agreements with certain affiliates of Apollo
Management, L.P., the Company's controlling stockholder ("Apollo"),
certain affiliates of Ares Management, L.P. and certain members of QDI
Inc.'s management, who collectively held $53.0 million aggregate
principal amount of the QDI Notes.
The exchange offer for the QDI Notes and the consent solicitation were
consummated on May 30, 2002. On such date, QDI Inc. accepted for exchange $61.4
million aggregate principal amount of the QDI Notes (excluding the $53.0 million
aggregate principal amount of the QDI Notes covered by the lock-up agreements).
All tendering holders received for each $1,000 principal amount of QDI Notes
tendered, a combination of debt and equity securities consisting of:
- - $650 principal amount of the New Notes;
- - $150 principal amount of 12% Junior Notes and;
- - 2.0415 warrants, each to purchase one share of QDI Inc.'s common stock
at an exercise price of $5 per share.
Pursuant to the terms of the lock-up agreements with Ares, Apollo and
QDI Inc.'s management, on May 30, 2002:
- - Ares exchanged its QDI Notes for the same combination of debt and
equity securities indicated above for tendering holders;
- - Apollo and QDI Inc.'s management group exchanged their respective QDI
Notes for shares of QDI Inc.'s 13.75% preferred stock; and
- - Apollo purchased for cash an additional $10 million of QDI Inc.'s
13.75% preferred stock, all of the proceeds of which were used by QDI
Inc. to retire certain borrowings under our credit agreement for which
Apollo had provided credit support.
18
In connection with the formation of the Company, all equity and
obligations of QDI Inc. were treated as additional paid-in capital of the
Company. See Consolidated Statement of Membership Interest at December 31, 2002
for information regarding changes in equity related to the Exchange Offer.
As a result of the transactions, on May 30, 2002, the Company issued
$54.5 million aggregate principal amount of its New Notes to the holders of QDI
Notes participating in the transactions and to Ares. Such notes are guaranteed
on a senior subordinated basis by all of the Company's domestic subsidiaries.
The guarantees are full, unconditional, joint and several obligations of the
guarantors. The Company's obligations under the notes and the guarantor's
obligations under the guarantees are secured by a second priority lien, subject
to certain exceptions, on all of the Company's domestic assets and the domestic
assets of the guarantors that secure the credit agreement and the interest rate
protection and other hedging agreements permitted thereunder, excluding capital
stock and other securities owned or held by the Company or the Company's
existing and future subsidiaries. Such notes bear interest at a rate of 12 1/2%
per annum, of which 7 1/4% per annum is payable in cash and 5 1/4% per annum is
payable in kind, subject to increases in the cash portion if total leverage
ratio or senior leverage ratio targets are met.
The accounting for the exchange offer followed the requirements of
Statement of Financial Accounting Standards No. 15 "Accounting by Debtors and
Creditors for Troubled Debt Restructurings" ("FAS 15"). A comparison was made
between the future cash outflows associated with the New Notes and the Junior
PIK Notes (including principal, interest and related costs), and the recorded
liabilities related to the QDI Notes. The carrying value of the QDI Notes
tendered and exchanged on May 30, 2002 became the carrying value of the New
Notes, less the fair value of the Warrants, Junior PIK Notes and 13.75%
preferred stock issued by QDI, Inc. Interest expense associated with the New
Notes will be calculated using the effective interest method, which is less than
the stated interest rates. There was no gain or loss for accounting purposes in
connection with the exchange of the New Notes and the Junior PIK Notes for the
QDI notes.
The carrying amount of the New Notes has been adjusted by $14.3 million
to reflect accounting under FAS15 and will be amortized over the life of the New
Notes as a reduction in interest expense. After the closing of the transactions,
$25.6 million in aggregate principal amount and carrying amount of the QDI Notes
remains outstanding. In addition, as a result of the closing of the
transactions, the amendments to the financial covenants contained in the Fifth
Amendment to our credit agreement previously entered into by QDI Inc. and the
Company became effective as discussed previously.
In connection with the exchange offering, deferred debt issue costs
relating to the fourth amendment to the Company's credit agreement totaling
approximately $4.2 million and legal and advisory fees relating to the exchange
offer totaling approximately $5.9 million were recorded as transaction expenses.
TRANCHE A, B, C AND D TERM LOANS
Tranche A Term Loans bear interest at the option of the Company at (a)
..075% in excess of the base rate equal to the higher of 1/2 of 1.0% in excess of
the federal funds rate or the rate that Credit Suisse/First Boston ("CSFB") as
the administrative agent announces from time to time as its prime lending rate,
as in effect from time to time (the "Base Rate"), or (b) 3.50% in excess of the
Eurodollar rate for Eurodollar Loans, in each case, subject to adjustment based
upon the achievement of certain financial ratios (5.25% at December 31, 2002).
Tranche B Term Loans bear interest at the option of the Company at (a)
1.25% in excess of the Base Rate or (b) 3.75% in excess of the Eurodollar rate
for Eurodollar Loans, in each case, subject to adjustment based upon the
achievement of certain financial ratios (5.53% at December 31, 2002).
Tranche C Term Loans bear interest at the option of the Company at (a)
1.50% in excess of the Base Rate and (b) 4.00% in excess of the Eurodollar rate
for Eurodollar Loans, in each case, subject to adjustment based upon the
achievement of certain financial ratios 5.75% at December 31, 2002).
Tranche D Term Loans bear interest at the option of the Company at (a)
1.00% in excess of the Base Rate and (b) 2.00% in excess of the Eurodollar rate
for Eurodollar Loans, in each case, subject to adjustment based upon the
achievement of certain financial ratios (5.25% at December 31, 2002).
19
REVOLVING CREDIT FACILITY
The Company has a $75.0 million revolving credit facility, which may
include letters of credit, available until June 9, 2004 to be used for, among
other things, working capital and general corporate purposes of the Company and
its subsidiaries, including permitted acquisitions. The revolving credit
facility further provides for a $15.0 million sublimit to be made available to
Levy, an indirect wholly-owned subsidiary of the Company. Amounts drawn under
the sublimit will be drawn in Canadian dollars.
Interest on the Revolving Credit Facility is, at the option of the
Company, (a) .75% in excess of the Base Rate or (b) 1.75% in excess of the
Eurodollar rate for Eurodollar Loans, in each case, subject to adjustments based
upon the achievement of certain financial ratios. The interest rate on the
Sublimit will be based on Canadian dollar bankers' acceptances and the Canadian
prime rate (4.5% at December 31, 2002).
The credit agreement provides for payment by the Company in respect of
outstanding letters of credit of an annual fee equal to the spread over the
Eurodollar rate for Eurodollar Loans under the revolving credit facility from
time to time in effect on the aggregate outstanding stated amounts of such
letters of credit, or a fronting fee equal to 3/8 of 1.0% on the aggregate
outstanding stated amounts of such letters of credit.
Levy will pay an acceptance fee equal to the Applicable Margin that
would be payable on Eurodollar Loans under the revolving credit facility on the
drawing date of each loan drawn under the sublimit.
The Company pays a commitment fee equal to 1/2 of 1.0% per annum on the
undrawn portion of the available commitment under the revolving credit facility,
subject to decreases based on the achievement of certain financial ratios.
The credit agreement was amended (the Fourth Amendment) on December 14,
2001. The new financial covenants were less restrictive than the previously
existing covenants and covered the period through December 31, 2002. The Fourth
Amendment restricted the amount of incremental future availability of the
revolving credit facility as of the date of the Amendment to $15.0 million,
including letters of credit, plus places restrictions on the amount of capital
expenditures allowed. At December 31, 2002, the Company had $26.7 million
available under the revolving credit facility. At December 31, 2002, we had
$22.1 million in letters of credit outstanding.
On April 5, 2002, we entered into a fifth amendment (the "Fifth
Amendment") to our credit agreement. The Fifth Amendment relates to the
financial covenants which were unlikely to be met beginning with the quarter
ending March 31, 2003, and further amended those financial covenants through the
date of the final maturity of our credit agreement in 2005. Such revised
covenants are less restrictive than the previously existing covenants for the
period ending March 31, 2003 through final maturity of our credit agreement.
There can be no assurance that we will be able to comply with these revised
financial covenants.
Voluntary prepayments and commitment reductions will be permitted in
whole or in part, subject to minimum prepayment or reduction requirements,
without premium or penalty, provided that voluntary prepayments of Eurodollar
Loans on a date other than the last day of the relevant interest period will be
subject to payment of customary breakage costs, if any.
SERIES B NOTES
The Series B Notes are guaranteed on a senior subordinated basis by all
of the Company's direct and indirect domestic subsidiaries. The guarantees are
full, unconditional, joint and several obligations of the guarantors. The
subordinated floating interest rate on Series B Notes was 6.22% at December 31,
2002.
20
The Company may redeem the Series B fixed rate notes, in whole at any
time or in part from time to time, on and after June 15, 2002, upon not less
than 30 nor more than 60 days notice, at the following redemption prices,
expressed as percentages of the principal amount thereof, if redeemed during the
twelve-month period commencing on June 15 of the year set forth below, plus, in
each case, accrued and unpaid interest thereon, if any, to the date of
redemption:
YEAR PERCENTAGE
2003 102.5%
2004 and thereafter 100.0%
The Company may redeem the Series B floating rate notes, in whole or in
part from time to time, upon not less than 30 nor more than 60 days notice at
the following redemption prices, expressed as percentages of the principal
amount thereof, if redeemed during the twelve-month period commencing on June 15
of the year set forth below, plus, in each case, accrued and unpaid interest
thereon, if any, to the date of redemption:
YEAR PERCENTAGE
2003 and thereafter 100.0%
COLLATERAL AND GUARANTEES
The loans and letters of credit under the revolving credit agreement
are guaranteed by all of the Company's existing and future direct and indirect
domestic subsidiaries, excluding Bulknet (collectively, the "Bank Guarantors").
The obligations of the Company and the Bank Guarantors are secured by a first
priority perfected lien on substantially all of the properties and assets of the
Company and the Bank Guarantors, now owned or subsequently acquired, including a
pledge of all capital stock and notes owned by the Company and the Bank
Guarantors, subject to certain exceptions; provided that, in certain cases, no
more than 65.0% of the stock of foreign subsidiaries of the Company are required
to be pledged.
Under the terms of the Company's credit agreement, the Company is
required to maintain, among other restrictions, minimum net worth levels, debt
to net worth ratios and debt service coverage ratios. In addition, the credit
agreement and the indenture governing the Series B notes contain restrictions on
debt incurrence, investments, transactions with affiliates, creation of liens,
asset dispositions and the payment of dividends.
DEBT RETIREMENT
Scheduled maturities of long-term debt and capital lease obligation
for the next five years and thereafter are as follows: (in thousands)
YEAR ENDING DECEMBER 31:
CAPITAL
TRANCHE TRANCHE TRANCHE TRANCHE OLD NEW LEASE
A B C D REVOLVER BONDS BONDS OBLIGATION TOTAL
---------------------------------------------------------------------------------------------------------------------
2003 $ 846 $ 985 $ 846 574 $ 3,251
2004 79,896 984 845 $26,000 107,725
2005 92,227 39,843 132,070
2006 39,208 $5,000 $25,600 69,808
2007 --
After $56,080 56,080
---------------------------------------------------------------------------------------------------------------------
$ 80,742 $94,196 $80,742 $5,000 $26,000 $25,600 $56,080 574 368,934
=====================================================================================================================
Bond carrying value in excess of face value 13,256
---------
Total indebtedness at 12/31/02 $382,190
========
The New Bonds carrying value include $1.6 million in payable-in-kind interest as
of December, 31, 2002. At the June 15, 2008 due date $20.1 million of
payable-in-kind interest will be due.
9. INCOME TAXES
Income taxes from continuing operations consisted of the following for
the years ended December 31:
2000 2001 2002
------- ----- ------
Current taxes:
Federal $ -- $ -- $ 550
Foreign 40 582 170
State 397 449 300
------- ----- -----
437 1,031 1,020
------- ----- -----
21
Deferred taxes:
Federal 22,480 -- --
Foreign 348 104 423
State 7,960 -- --
------- ------ ------
30,788 104 423
------- ------ ------
Provision (benefit) for income taxes $31,225 $1,135 $1,443
======= ====== ======
The net deferred tax asset (liability) consisted of the following at
December 31:
2001 2002
---- ----
Deferred tax assets:
Environmental reserve $ 14,474 $ 11,216
Tax credit carryforwards 2,946 2,457
Self-insurance reserves 2,639 3,467
Allowance for doubtful accounts 3,055 2,606
Accrued vacation pay 328 189
Pension 3,563 543
Bond Discount 4,965 4,415
Net operating loss carryforwards 29,299 33,570
Restructuring accruals 743 455
OID subordinated debt -- 512
Other accruals 2,445 1,483
State taxes, net 3,798 3,110
-------- --------
68,255 64,023
Less valuation allowance (33,960) (31,523)
-------- --------
34,295 32,500
-------- --------
Deferred tax liabilities:
Property and equipment basis differences (31,262) (31,388)
Capital leases treated as operating leases for tax purposes as lessor (1,231) --
Deferred environmental (1,447) --
Tires -- (933)
Other (1,625) (1,540)
-------- --------
(35,565) (33,861)
-------- --------
Net deferred tax (liability) (1,270) (1,361)
-------- --------
Long-term net deferred tax (liability) $ (1,270) $ (1,361)
======== ========
The Company has provided a valuation allowance against net deferred tax
assets, due to cumulative losses in recent years.
The Company's effective tax rate differs from the federal statutory
rate. The reasons for those differences are as follows for the years ended
December 31:
2000 2001 2002
------- ------- -------
Tax (benefit) at the statutory rate $(3,591) $(4,056) $(5,458)
State income taxes, net of federal benefit 397 (411) (624)
Amortization of goodwill 1,294 1,295 --
Foreign taxes 388 313 1,451
Equity in earnings of foreign subs - - 762
Valuation allowance 32,573 3,413 5,126
Other 164 581 186
------- ------- -------
Provision (benefit) for income taxes $31,225 $ 1,135 $ 1,443
======= ======= =======
At December 31, 2002, the Company has approximately $99 million in net
operating loss carryforwards and $2.5 million in alternative minimum tax credit
carry forwards. The net operating loss carryforwards will expire in the years
2011 through 2022 while the alternative minimum tax credits may be carried
forward indefinitely. Approximately $28.7 million of net operating loss carry
forwards and $1.9 of alternative minimum tax credit carryforwards were generated
by Chemical Leaman Corporation prior to their acquisition. The use of
pre-acquisition operating losses and tax credit carryforwards is subject to
limitations imposed by the Internal
22
Revenue Code. The Company has state net operating loss carry forwards which
expire over the next 2 to 20 years.
The Company filed for and received a refund of $4.4 million in
previously paid federal income tax as a result of carrying back a portion of the
1998 net operating loss. This refund claim is currently under examination by the
Internal Revenue Service. The resolution of this examination is still uncertain,
however, we have provided $0.6 million of tax expense in connection with this
matter in 2002.
10. EMPLOYEE BENEFIT PLANS
The Company maintains two noncontributory defined benefit plans
resulting from a prior acquisition that covers certain full-time salaried
employees and certain other employees under a collective bargaining agreement.
Retirement benefits for employees covered by the salaried plan are based on
years of service and compensation levels. The monthly benefit for employees
under the collective bargaining agreement plan is based on years of service
multiplied by a monthly benefit factor. Assets of the plans are invested
primarily in equity securities and fixed income investments. Pension costs are
funded in accordance with the provisions of the applicable law.
Effective November 1, 2001, the Company amended the collective
bargaining agreement plan to freeze benefit accruals and allow participants to
retire as early as age 50 with unreduced benefits. Since no prior service cost
base existed prior to the amendment and the projected benefit obligation was not
impacted by the change, there was no impact on the accrued pension cost.
The components of net periodic pension cost are as follows at December
31 (in thousands):
COMPONENTS OF NET PERIODIC PENSION COST 2000 2001 2002
------- ------- ------
Service cost $ 252 $ 224 $ 252
Interest cost 2,641 2,717 2,792
Expected Return on plan assets (2,721) (2,518) (2,150)
------- ------- ------
Net periodic pension cost $ 172 $ 423 $ 894
======= ======= =======
The actuarial assumptions used in accounting for the plans are as
follows at December 31:
2000 2001 2002
---- ---- ----
Discount rates 7.50% 7.25% 6.75%
Expected long-term rates of return on plan assets 8.00% 8.00% 8.00%
The following table sets forth the change in the benefit obligation,
change in plan assets and funded status of the two plans: (in thousands)
DECEMBER 31,
2001 2002
-------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 37,257 $ 39,928
Service cost 224 252
Interest cost 2,717 2,792
Amendments 1,372 --
Actuarial (gain)/loss 1,376 3,491
Benefits and expenses paid (3,018) (3,159)
-------- --------
Benefit obligation at end of year $ 39,928 $ 43,304
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 31,574 $ 30,782
Actual return on plan assets (502) (2,173)
Contributions 2,728 2,767
Benefits and expenses paid (3,018) (3,159)
-------- --------
Fair value of plan assets at end of year $ 30,782 $ 28,217
======== ========
23
UNFUNDED STATUS
Unrecognized net actuarial (gain) loss $ 6,396 $ 14,304
Unrecognized prior service cost 1,356 1,262
Adjustment to recognize minimum liability (7,752) (15,566)
-------- --------
Accrued pension expense (included in other
non-current liability) $ (9,146) $(15,087)
======== ========
The Company charged to operations payments to multi-employer pension
plans required by collective bargaining agreements of approximately $2.0
million, $1.6 million and $1.5 million for the years ended December 31, 2000,
2001 and 2002, respectively. These defined benefit plans cover substantially all
of the Company's union employees not covered under the Company's plan. The
actuarial present value of accumulated plan benefits and net assets available
for benefits to employees under these multi-employer plans is not readily
available.
In 2001, the Company established a Deferred Compensation Plan for its
executives and other key employees. The plan is a non-qualified deferral plan
that allows participants to contribute a portion of their wages on a pre-tax
basis and includes a death benefit. The Company may credit participant's
accounts with a discretionary contribution at its sole discretion. No such
contribution was made in 2001 or 2002.
11. CAPITAL STOCK
QDI, Inc. has authorized 5.0 million shares, par value, $.01 per share,
of "preferred stock." Shares of preferred stock may be issued from time to time,
in one or more series, with such designation, assigned values, preferences and
relative, participating, optional or other rights, qualifications, limitations
or restrictions thereof as the Board of Directors of QDI, Inc. from time to time
may adopt by resolution.
No holder of preferred shares of QDI, Inc. shall have any preferential
or preemptive right to subscribe for, purchase or receive any share of stock,
any options or warrants for such shares, any rights to subscribe to or purchase
such shares or any securities which may at any time or from time to time be
issued, sold or offered for sale. As a result of the May 30, 2002 Exchange
Offer, all preferred shares issued by QDI, Inc., the parent of QD, LLC continue
to be outstanding.
The Board of Directors has authorized the issuance of 13.75% Senior
Exchangeable Preferred Stock. The designation, assigned values, preferences and
relative, participating, optional or other rights, qualifications, limitations
or restrictions on such preferred stock are summarized below.
13.75% MANDATORILY REDEEMABLE PREFERRED STOCK
In 1998, QDI, Inc. issued 105,000 shares of 13.75% non-voting Senior
Exchangeable Preferred Stock with a liquidation preference of $100. Dividends
are payable quarterly commencing December 15, 1998 and are cumulative. Any
dividends not paid in cash prior to September 15, 2001 may be paid in additional
shares of Senior Exchangeable Preferred Stock. All shares are mandatorily
redeemable on September 15, 2006 at 100% of the liquidation preference plus all
accrued dividends.
At its option, QDI, Inc. may redeem the Senior Exchangeable Preferred
Stock after September 15, 2003 for a percentage of liquidation preference in
2003 at 106.88%, 2004 at 103.44%, 2005 and thereafter at 100%. Prior to
September 15, 2003, Company may retire this stock from the proceeds of an
initial public offering for 113.75% of liquidation preference. As a result of
the May 30, 2002 Exchange Offer, all preferred shares issued by QDI, Inc., the
parent of QD, LLC continue to be outstanding.
COMMON STOCK
QDI, Inc. has 15.0 million shares $.01 par value of common stock
authorized and had 2.02 million and 2.00 million shares outstanding at December
31, 2000 and 2001, respectively. One shareholder has the right to "put" 30
thousand shares to QDI, Inc. in 2003 for the current market value per share.
Accordingly, these shares were classified as mandatorily redeemable.
In connection with the recapitalization, the Company made limited
recourse secured loans to shareholders which bear interest at LIBOR plus 2%. The
loans are secured by a pledge of approximately 44,000 shares of the Company's
common stock and options to purchase 44,000 shares of the Company's common
stock. As a result of the May 30, 2002 exchange offer, the notes are recorded by
QDI, Inc. the parent company to QD LLC.
24
The principal amount of the loans is due on June 9, 2006, with
mandatory pre-payments due upon, and to the extent of, the receipt of
after-tax proceeds from the sale of the pledged securities. Amounts
outstanding for these loans were $1,776 at December 31, 2001. Pursuant
to the Exchange Offer, the Company became successor to QDI, Inc. and
accordingly issued membership interest rather than common stock. As a
result of the May 30, 2002 Exchange Offer all common shares issued by
QDI Inc., the parent of QD LLC continue to be outstanding.
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases revenue and other equipment under
operating leases. Future minimum lease payments under non-cancelable
operating leases at December 31, 2002 are as follows: (in thousands)
OPERATING
YEAR ENDING DECEMBER 31, LEASES
---------
2003 $3,150
2004 2,072
2005 1,759
2006 1,190
2007 and after --
Rent expense under operating leases was $6,447,000, $4,286,000
and $4,326,000 for the years ended December 31, 2000, 2001 and 2002,
respectively.
ENVIRONMENTAL MATTERS
Our activities involve the handling, transportation, storage
and disposal of bulk liquid chemicals, many of which are classified as
hazardous materials, hazardous substances, or hazardous waste. Our
tank wash and terminal operations engage in the storage or discharge
of wastewater and storm-water that may have contained hazardous
substances, and from time to time we store diesel fuel and other
petroleum products at our terminals. As such, we are subject to
environmental, health and safety laws and regulation by U.S. federal,
state, local and Canadian government authorities. Environmental laws
and regulations are complex, change frequently and have tended to
become more stringent over time. There can be no assurance that
violations of such laws or regulations will not be identified or occur
in the future, or that such laws and regulations will not change in a
manner that could impose material costs to us.
Facility managers are responsible for environmental
compliance. Self-audits conducted by our internal audit staff are
required to assess operations, safety training and procedures,
equipment and grounds maintenance, emergency response capabilities and
waste management. We may also contract with an independent
environmental consulting firm that conducts periodic, unscheduled,
compliance assessments which focus on conditions with the potential to
result in releases of hazardous substances or petroleum, and which
also include screening for evidence of past spills or releases. Our
relationship to our affiliates could, under certain circumstances,
result in our incurring liability for environmental contamination
attributable to an affiliate's operations, although we have not
incurred any material derivative liability in the past. Our
environmental management program has been extended to our affiliates.
Our staff includes environmental experts who develop policies and
procedures, including periodic audits of our terminals, tank cleaning
facilities, and historic operations, in an effort to avoid
circumstances that could lead to future environmental exposure.
As a handler of hazardous substances, we are potentially
subject to strict, joint and several liability for investigating and
rectifying the consequences of spills and other environmental releases
of such substances either under the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended ("CERCLA")
and comparable state laws. From time to time, we have incurred
remedial costs and regulatory penalties with respect to chemical or
wastewater spills and releases at our facilities and, notwithstanding
the existence of our environmental management program, we cannot
assure that such obligations will not be incurred in the future, nor
that such liabilities will not result in a material adverse effect on
our financial condition, results of operations or our business
reputation. As the result of environmental studies conducted at our
facilities in conjunction with our environmental management program,
we have identified environmental contamination at certain sites that
will require remediation.
25
We have also been named a potentially responsible party
("PRP"), or have otherwise been alleged to have some level of
responsibility, under CERCLA or similar state laws for cleanup of
off-site locations at which our waste, or material transported by us,
has allegedly been disposed of. We have asserted defenses to such
actions and have not incurred significant liability in the CERCLA
cases settled to date. While we believe that we will not bear any
material liability in any current or future CERCLA matters, there can
be no assurance that we will not in the future incur material
liability under CERCLA or similar laws.
We are currently solely responsible for remediation of the
following two federal Superfund sites:
Bridgeport, New Jersey. During 1991, CLC entered into a
Consent Decree with the EPA filed in the U.S. District Court for the
District of New Jersey, U.S. v. Chemical Leaman Tank Lines, Inc.,
Civil Action No. 91-2637 (JFG) (D.N.J.), with respect to its site
located in Bridgeport, New Jersey, requiring CLC to remediate
groundwater contamination. The Consent Decree required CLC to
undertake Remedial Design and Remedial Action ("RD/RA") related to the
groundwater operable unit of the cleanup. A groundwater remedy design
has subsequently been approved by the EPA and is under consideration.
In August 1994, the EPA issued a Record of Decision, selecting
a remedy for the wetlands operable unit at the Bridgeport site at a
cost estimated by the EPA to be approximately $7 million. In October
1998, the EPA issued an administrative order that requires CLC to
implement the EPA's wetlands remedy. A remedial design for this remedy
is currently under consideration by EPA and the State of New Jersey. In
April 1998, the federal and state natural resource damages trustees
indicated their intention to bring claims against CLC for natural
resource damages at the Bridgeport site. CLC finalized a consent
decree on March 16, 2001 with the state and federal trustees and has
resolved the natural resource damages claims. In addition, the EPA has
investigated contamination in site soils. No decision has been made as
to the extent of soil remediation to be required, if any.
CLC initiated litigation against its insurers to recover its
costs in connection with environmental cleanups at its sites. In a
case captioned Chemical Leaman Tank Lines, Inc. v. Aetna Casualty &
Surety Co., et al., Civil Action No. 89-1543 (SSB) (D.N.J.), Chemical
Leaman sought from its insurers reimbursement of substantially all
past and future environmental cleanup costs at the Bridgeport site. In
a case captioned The Aetna Casualty and Surety Company v. Chemical
Leaman Tank Lines, Inc., et al., Civil Action No. 94-CV-6133 (E.D.
Pa.), Chemical Leaman sought from its insurers reimbursement of
substantially all past and future environmental cleanup costs at its
other sites. In an agreement dated as of November 18, 1999, Chemical
Leaman favorably resolved these outstanding insurance claims for $33.0
million. We received $21.5 million of the settlement proceeds in late
1999 and the balance in early 2000.
West Caln Township, PA. The EPA has alleged that CLC disposed
of hazardous materials at the William Dick Lagoons Superfund Site in
West Caln, Pennsylvania. On October 10, 1995, CLC entered into a
Consent Decree with the EPA which required CLC to:
- pay the EPA for installation of an alternate water line to
provide water to area residents;
- perform an interim groundwater remedy at the site; and
- conduct soil remediation. US v. Chemical Leaman Tank Lines,
Inc., Civil Action No. 95-CV-4264 (RJB) (E.D. Pa.).
CLC has paid all costs associated with installation of the
waterline. CLC has completed a groundwater study, and has submitted
designs for a groundwater treatment plant to pump and treat
groundwater. The EPA anticipates that CLC will conduct the groundwater
remedy over the course of five years, at which time the EPA will
evaluate groundwater conditions and determine whether further
groundwater remedy is necessary. Field sampling for soil remediation
and activities for the design of a soil remediation system have been
completed. Soil remediation will include the use of both a low
temperature thermal treatment unit and a soil vapor extraction system.
The Consent Decree does not cover the final groundwater remedy or
other site remedies or claims, if any, for natural resource damages.
Other Environmental Matters. CLC has been named as PRP under
CERCLA and similar state laws at approximately 35 former waste
treatment and/or disposal sites including the Helen Kramer Landfill
Site where CLC previously settled its liability. In general, CLC is
among several PRP's named at these sites. CLC is also named as
co-defendant in two civil toxic tort claims arising from alleged
exposure to hazardous substances that
26
were allegedly transported to disposal sites by CLC and other
co-defendants. CLC is also incurring expenses resulting from the
investigation and/or remediation of certain current and former CLC
properties, including its facility in Tonawanda, New York, its former
facility in Putnam County, West Virginia, and its facility in
Charleston, West Virginia. As a result of our acquisition of CLC, we
identified other owned or formerly owned properties that may require
investigation and/or remediation, including properties subject to the
New Jersey Industrial Sites Recovery Act (ISRA). CLC's involvement at
some of the above referenced sites could amount to material
liabilities, and there can be no assurance that costs associated with
these sites, individually or in the aggregate, will not be material. We
currently have reserves in the amount of $33.0 million for liabilities
associated with the Helen Kramer Landfill, CLC's facility at Tonawanda,
New York and CLC's former facility in Putnam County, West Virginia and
the other matters discussed above.
The activity in the environmental liability reserves is as
follows: (in thousands)
2000 2001 2002
------- -------- -------
Beginning Balance at January 1 $62,891 $ 53,238 $42,572
Payments (7,852) (10,666) (3,636)
Reserve Adjustments (1,801) -- (5,950)
------- -------- -------
$53,238 $ 42,572 $32,986
======= ======== =======
The balances presented include both long term and current
environmental reserves, of which $5.6 million is included in accrued
expenses in the Consolidated Balance Sheet. We expect these
environmental obligations to be paid over the next five to seven years.
13. OTHER TRANSACTIONS WITH RELATED PARTIES
QDI Inc. and Apollo Management have entered into a management
agreement whereby we retained Apollo Management to provide financial
and strategic advice to us. Pursuant to the terms of the management
agreement, Apollo Management has agreed at such time to provide
financial and strategic services to us as reasonably requested by our
Board of Directors. As consideration for services to be rendered under
the management agreement, Apollo Management received an initial fee of
$2.0 million on June 9, 1998 and thereafter will receive an annual fee
of $500,000 until termination of the management agreement. The
management agreement may be terminated upon 30 days written notice by
Apollo Management or us to the other party thereto. Under this
agreement we recognized $500,000 in selling and administrative expense
in 2000 and 2001. The agreement was suspended for 2002 and therefore we
did not recognize any selling and administrative expense for these
services. In 2002 we provided advisory and consulting services to
Apollo Management and certain of its affiliates. The fee for these
services was $300,000, and was recorded as a reduction in selling and
administrative costs in 2002.
An executive of the Company owns a minority interest in a
firm that provides information technology services to the company.
Total amounts paid by the Company to the firm during 2000, 2001 and
2002 were $344,000, $532,000, and $407,000 respectively.
In August 2001, QDI entered into an agreement to affiliate
the facilities in Bridgeport, NJ with a director/ shareholder. The
director/ shareholder has been operating this location under the
affiliate program. The aggregate 2002 revenue for those operations was
$8.8 million. As of December 31, 2002 $0.1 million was owed to the
Company in connection with this affiliate operation.
During 2001, Apollo and certain members of our management
acquired, in aggregate, $30.5 million of QDI's Series B Notes.
Pursuant to a Put and Call agreement dated December 14, 2001
between Apollo and the senior lender, administrative agent under our
credit agreement, at the request of any of the Tranche D participating
banks (as defined in the credit agreement) and after certain
triggering events, Apollo is required to purchase all of the Tranche D
term loans held by such Tranche D banks. In addition, Apollo has the
right, in its sole discretion, to purchase all or any part of the
Tranche D term loans from the Trance D banks at any time.
27
14. GEOGRAPHIC SEGMENTS
The Company's operations are located primarily in the United
States, Canada, and Mexico. Inter-area sales are not significant to
the total revenue of any geographic area. Information about the
Company's operations in different geographic areas for the years ended
December 31, 2000, 2001 and 2002 is as follows: (in thousands)
2000
----------------------------------------------------------------
U.S. INTERNATIONAL ELIMINATIONS CONSOLIDATED
-------- ------------- ------------ ------------
Operating revenues $544,699 $11,848 $ -- $556,547
Net operating income 28,797 797 -- 29,594
Identifiable assets 436,574 32,298 (15,799) 453,073
Depreciation and amortization 33,155 2,126 -- 35,281
Capital expenditures 19,623 3,456 -- 23,079
2001
(RESTATED)
----------------------------------------------------------------
U.S. INTERNATIONAL ELIMINATIONS CONSOLIDATED
-------- ------------- ------------ ------------
Operating revenues $501,531 $ 9,170 $ -- $510,701
Net operating income 27,400 919 -- 28,319
Identifiable assets 448,408 15,018 (15,288) 448,138
Depreciation and amortization 31,848 1,562 -- 33,410
Capital expenditures 36,631 781 -- 37,412
2002
----------------------------------------------------------------
U.S. INTERNATIONAL ELIMINATIONS CONSOLIDATED
-------- ------------- ------------ ------------
Operating revenues $507,983 $ 8,555 $ -- $516,538
Net operating income 27,022 261 -- 27,283
Identifiable assets 367,914 31,888 (12,537) 387,265
Depreciation and amortization 30,297 1,526 -- 31,823
Capital expenditures 15,221 65 -- 15,286
15. OTHER OPERATING CHARGES
Our operating expenses have been impacted by several charges
in both 2001 and 2002. We have incurred severance, benefits and other
related expenses from cost cutting measures and consolidating
terminals that resulted in charges of $1.0 million and $1.8 million in
2002 and 2001, respectively. In addition we had charges related to the
prior operations of Chemical Leaman of $2.4 million and $2.3 million
in 2001 and 2002, respectively, related to insurance claims associated
with the operations of predecessor companies incurred prior to the
merger in 1998.
Selling and administrative expenses in the fourth quarter of
2002 include a $3.9 million charge to increase the reserve for
uncollectible accounts, due to increased collection efforts on trade
receivables and receivables from terminated owner-operators and
affiliates. Additionally, a $4.0 million reduction in environmental
liabilities was recorded, reflecting lower than anticipated
environmental clean-up costs based on new estimates of existing sites.
16. GUARANTOR SUBSIDIARIES
The 10% Series B Senior Subordinated Notes due 2006 and Series
B Floating Interest Rate subordinated Term Notes due 2006 of QDI Inc.
and the 12-1/2% senior subordinated secured notes of the Company are
unconditionally guaranteed on a senior subordinated basis pursuant to
guarantees by all the Company's direct and indirect domestic
subsidiaries, (the Guarantors). Each of the Company's direct and
indirect subsidiaries is 100% owned. All non-domestic subsidiaries
including Levy Transport, Ltd. are non-guarantor subsidiaries.
The Company conducts substantially all of its business
through and derives virtually all its income from its subsidiaries.
Therefore, the Company's ability to make required principal and
interest payments with respect to all the Company's indebtedness,
including the New Notes and other obligations, depends on the earning
of subsidiaries and its ability to received funds from its
subsidiaries through dividend and other payments. The subsidiary
guarantors are wholly owned subsidiaries of the Company and have fully
and unconditionally guaranteed the New Notes on a joint and several
basis.
The Company has not presented separate financial statements
and other disclosures concerning subsidiary guarantors because
management has determined such information is not material to the
holders of the Notes.
28
The following condensed consolidating financial information
presents:
Condensed consolidating balance sheets at December 31, 2001
and 2002 and condensed consolidating statements of operations and of
cash flows for the three years ended December 31, 2002.
The parent company, non-guarantor subsidiaries and combined guarantor
subsidiaries.
Elimination entries necessary to consolidate the parent
company and all its subsidiaries.
29
CONSOLIDATING BALANCE SHEET, DECEMBER 31, 2002
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 284 $ 377 -- $ 661
Accounts receivable, net -- 82,876 (7,448) -- 75,428
Current maturities of other receivable -- 991 -- -- 991
Inventories -- 792 106 -- 898
Prepaid expenses -- 5,080 106 -- 5,186
Prepaid tires -- 7,709 185 -- 7,894
Other -- 1,587 -- -- 1,587
--------- --------- --------- --------- ---------
Total current assets -- 99,319 (6,674) -- 92,645
Property and equipment, net -- 145,946 7,615 -- 153,561
Intangibles and goodwill -- 131,869 448 -- 132,317
Deferred income taxes -- -- -- -- --
Investment in subsidiaries 164,314 -- -- 164,314 --
Other assets 100,000 8,738 4 (100,000) 8,742
--------- --------- --------- --------- ---------
$ 264,314 $ 385,872 $ 1,393 $(264,314) $ 387,265
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of
Indebtedness $ 3,251 $ -- $ -- $ -- $ 3,251
Accounts payable -- 11,954 1,402 -- 13,356
Inter-company -- 21,881 (21,881) -- --
Affiliates and Owner-operators payable -- 10,571 33 -- 10,604
Accrued expenses -- 44,248 -- -- 44,248
Income taxes payable -- 1,268 301 -- 1,569
--------- --------- --------- --------- ---------
Total current liabilities 3,251 89,922 (20,145) -- 73,028
Long term debt, less current maturities 373,939 -- 5,000 -- 378,939
Accrued loss and damage claims -- 4,905 -- 4,905
Environmental liabilities -- 27,324 -- -- 27,324
Other long-term liabilities -- 112,751 -- (100,000) 12,751
Deferred income tax -- (1,175) 2,536 -- 1,361
--------- --------- --------- --------- ---------
Total liabilities 377,190 233,727 (12,609) (100,000) 498,308
--------- --------- --------- --------- ---------
Minority interest in subsidiaries -- 1,833 -- -- 1,833
Membership interest:
Membership interest and paid-in capital 176,436 97,414 15,127 (112,541) 176,436
Accumulated earnings (deficit) (83,892) 52,898 (42) (52,856) (83,892)
Stock recapitalization (189,589) -- (55) 55 (189,589)
Other comprehensive (loss) (15,831) -- (1,028) 1,028 (15,831)
--------- --------- --------- --------- ---------
Total membership interest (112,876) 150,312 14,002 (164,314) (112,876)
--------- --------- --------- --------- ---------
$ 264,314 $ 385,872 $ 1,393 $(264,314) $ 387,265
========= ========= ========= ========= =========
30
CONSOLIDATING BALANCE SHEET, DECEMBER 31, 2001 (RESTATED)
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 1,909 $ 303 $ 2,212
Accounts receivable, net 82,263 2,884 85,147
Current maturities and other
receivables 891 -- 891
Inventories 874 269 1,143
Prepaid expenses 5,617 150 5,767
Prepaid tires 8,577 391 8,968
Income tax recoverable 306 -- 306
Other 1,775 -- 1,775
--------- --------- --------- --------- ---------
Total current assets -- 102,212 3,997 -- 106,209
Property and equipment, net 160,998 16,361 177,359
Intangibles and Goodwill, net 151,969 806 152,775
Insurance proceeds and other
environmental receivables -- -- --
Deferred income taxes -- -- --
Investment in subsidiaries 226,138 -- -- (226,138) --
Other assets 100,000 11,791 4 (100,000) 11,795
--------- --------- --------- --------- ---------
$ 326,138 $ 426,970 $ 21,168 $(326,138) $ 448,138
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of
indebtedness $ 2,677 $ -- $ -- $ -- 2,677
Accounts payable -- 11,432 1,985 -- 13,417
Inter-company
Affiliates and -- (1,133) 1,133 -- --
owner-operators payable -- 4,902 28 -- 4,930
Accrued expenses -- 49,551 -- -- 49,551
Income taxes payable -- 663 429 -- 1,092
--------- --------- --------- --------- ---------
Total current liabilities 2,677 65,415 3,575 -- 71,667
Long-term debt, less current
maturities 441,179 -- -- -- 441,179
Environmental liabilities -- 36,163 -- -- 36,163
Other long-term liabilities -- 113,744 -- (100,000) 13,744
Deferred income tax -- (1,189) 2,459 -- 1,270
--------- --------- --------- --------- ---------
Total liabilities 443,856 214,133 6,034 (100,000) 564,023
--------- --------- --------- --------- ---------
Mandatory redeemable common stock 1,210 -- -- -- 1,210
--------- --------- --------- --------- ---------
Mandatory redeemable preferred stock 16,499 -- -- -- 16,499
--------- --------- --------- --------- ---------
Minority interest in subsidiaries -- 1,833 -- -- 1,833
--------- --------- --------- --------- ---------
Shareholders' equity:
Common stock and additional
paid-in capital 105,564 149,653 15,082 (164,735) 105,564
Retained earnings (deficit) (38,395) 61,351 1,195 (62,546) (38,395)
Treasury Stock (402) -- -- -- (402)
Stock recapitalization (189,589) -- (55) 55 (189,589)
Other comprehensive gain (loss) (10,829) -- (1,088) 1,088 (10,829)
Note receivable (1,776) -- -- -- (1,776)
--------- --------- --------- --------- ---------
Total shareholders' equity (deficit) (135,427) 211,004 15,134 (226,138) (135,427)
--------- --------- --------- --------- ---------
$ 326,138 $ 426,970 $ 21,168 $ 326,138 $ 448,138
========= ========= ========= ========= =========
31
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
Operating revenues:
Transportation $ -- $ 440,140 $ 7,758 $ -- $ 447,898
Other -- 67,843 797 -- 68,640
-------- --------- ------- ------- ---------
Total revenues -- 507,983 8,555 -- 516,538
Operating expenses:
Purchased transportation -- 300,694 1,227 -- 301,921
Depreciation and amortization -- 30,185 1,638 -- 31,823
Other operating expenses -- 150,081 5,430 -- 155,511
-------- --------- ------- ------- ---------
Operating income -- 27,023 260 -- 27,283
Interest expense, net (42,962) -- (247) -- (43,209)
Other expense -- 129 (3) -- 126
Equity in earnings of subsidiaries (11,777) -- -- 11,777 --
-------- --------- ------- ------- ---------
Income (loss) before taxes (54,739) 26,894 16 11,777 (16,052)
Income taxes (10,346) 11,215 574 -- 1,443
-------- --------- ------- ------- ---------
Net income(loss)from continuing operations (44,393) 15,679 (558) 11,777 (17,495)
Discontinued operations:
Income or (loss)from operation and disposal
of discontinued division net of tax -- -- (2,913) -- (2,913)
Cumulative effect of change in accounting
principle (net of tax) -- (23,985) -- -- (23,985)
-------- --------- ------- ------- ---------
Net income (loss) $(44,393) $ (8,306) $(3,471) $11,777 $ (44,393)
======== ========= ======= ======= =========
32
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001 (RESTATED)
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
Operating revenues:
Transportation $ -- $ 437,729 $ 7,807 $ (720) $ 444,816
Other -- 64,523 1,362 -- 65,885
-------- --------- ------- -------- ---------
Total revenues -- 502,252 9,169 (720) 510,701
Operating expenses:
Purchased transportation -- 298,098 1,310 (720) 298,688
Depreciation and amortization -- 31,848 1,562 -- 33,410
Other operating expenses -- 144,906 5,378 -- 150,284
-------- --------- ------- -------- ---------
Operating income -- 27,400 919 -- 28,319
Interest expense, net (40,227) -- 3 -- (40,224)
Other expense -- (22) -- -- (22)
Equity in earnings of subsidiaries 15,636 -- -- (15,636) --
-------- --------- ------- -------- ---------
Income (loss) before taxes (24,591) 27,378 922 (15,636) (11,927)
Income taxes (11,170) 11,619 686 -- 1,135
-------- --------- ------- -------- ---------
Net income(loss)from continuing operations (13,421) 15,759 236 (15,636) (13,062)
Discontinued operations:
Income or (loss)from operation of
discontinued division net of tax -- -- (359) -- (359)
-------- --------- ------- -------- ---------
Net income (loss) $(13,421) $ 15,759 $ (123) $(15,636) $ (13,421)
======== ========= ======= ======== =========
33
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
Operating revenues:
Transportation $ -- $478,741 $ 9,771 $ 323 $ 488,835
Other -- 65,635 2,077 -- 67,712
-------- -------- -------- -------- ---------
Total revenues -- 544,376 11,848 323 556,547
Operating expenses:
Purchased transportation -- 319,096 1,524 323 320,943
Depreciation and amortization -- 33,155 2,126 -- 35,281
Other operating expenses -- 163,305 7,424 -- 170,729
-------- -------- -------- -------- ---------
Operating income -- 28,820 774 -- 29,594
Interest expense, net (39,934) -- (302) -- (40,236)
Other expense -- 20 4 -- 24
Equity in earnings of subsidiaries 17,448 -- -- (17,448) --
-------- -------- -------- -------- ---------
Income (loss) before taxes (22,486) 28,840 476 (17,448) (10,618)
Income taxes 19,301 11,824 100 -- 31,225
-------- -------- -------- -------- ---------
Net income(loss)from continuing operations (41,787) 17,016 376 (17,448) (41,843)
Discontinued operations:
Income or (loss)from operation of
discontinued division net of tax -- -- 56 -- 56
-------- -------- -------- -------- ---------
Net income (loss) $(41,787) $ 17,016 $ 432 $(17,448) $ (41,787)
======== ======== ======== ======== =========
34
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
Cash provided by (used for)
operating activities:
Net income (loss) $(44,393) $ (8,306) $(3,471) $ 11,777 $(44,393)
Adjustments for non-cash
charges 44,393 23,418 1,014 -- 68,825
Changes in assets and
liabilities -- 11,560 1,617 (11,777) 1,400
-------- -------- ------- -------- --------
Net cash provided by
Operating activities -- 26,672 (840) -- 25,832
-------- -------- ------- -------- --------
Investing activities:
Capital expenditures -- (15,282) (4) -- (15,286)
Proceeds from asset
dispositions -- 7,242 875 -- 8,117
Other -- -- -- -- --
-------- -------- ------- -------- --------
Net cash used for investing
activities -- (8,040) 871 -- (7,169)
-------- -------- ------- -------- --------
Financing activities:
Capital Contribution 10,000 10,000
Payment of debt obligations (17,484) -- -- -- (17,484)
Exchange offer fees (5,501) -- -- -- (5,501)
Stock transactions (1,032) -- -- -- (1,032)
Other -- (6,025) 44 -- (5,981)
Net change in intercompany
balances 14,017 (14,017) -- -- --
-------- -------- ------- -------- --------
Net cash provided (used for)
financing activities -- (20,042) 44 -- 19,998
-------- -------- ------- -------- --------
Net increase in cash -- (1,410) 75 -- (1,335)
Effect of exchange rate changes
on cash -- (216) -- -- (216)
Cash, beginning of period -- 1,910 302 -- 2,212
-------- -------- ------- -------- --------
Cash, end of period $ -- $ 284 $ 377 $ -- $ 661
======== ======== ======= ======== ========
35
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001 (RESTATED)
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------- ------------ ------------
Cash provided by (used for)
operating activities:
Net income (loss) $ (13,421) $ 15,759 $ (123) $ (15,636) $ (13,421)
Adjustments for non-cash
charges 13,421 18,565 3,328 -- 35,314
Changes in assets and
liabilities -- (25,678) (4,383) 15,636 (14,425)
--------- -------- -------- ------- ---------
Net cash provided by
Operating activities -- 8,646 (1,178) -- 7,468
--------- -------- -------- ------- ---------
Investing activities:
Capital expenditures -- (36,393) (1,019) -- (37,412)
Proceeds from asset
dispositions -- 80 2,396 -- 2,476
Other -- -- -- -- --
--------- -------- -------- ------- ---------
Net cash used for investing
activities -- (36,313) 1,377 -- (34,936)
--------- -------- -------- ------- ---------
Financing activities:
Proceeds from issuance of
long-term debt
and capital leases 45,000 -- -- -- 45,000
Payment of debt obligations (18,019) -- (64) -- (18,083)
Stock transactions (3,115) -- -- -- (3,115)
Other 3,461 -- -- -- 3,461
Net change in intercompany
balances (27,327) 27,327 -- -- --
--------- -------- -------- ------- ---------
Net cash provided by financing
activities -- 27,327 (64) -- 27,263
--------- -------- -------- ------- ---------
Net increase in cash -- (340) 135 -- (205)
Effect of exchange rate changes
on cash -- (219) -- -- (219)
Cash, beginning of period -- 2,469 167 -- 2,636
--------- -------- -------- ------- ---------
Cash, end of period $ -- $ 1,910 $ 302 $ -- $ 2,212
========= ======== ======== ======= =========
36
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
Cash provided by (used for)
operating activities:
Net income (loss) $(41,787) 17,016 432 $(17,448) $(41,787)
Adjustments for non-cash
Charges 41,787 21,581 3,742 -- 67,110
Changes in assets and
liabilities -- (9,790) 8,301 17,448 15,959
-------- -------- -------- -------- --------
Net cash provided by
Operating activities -- 28,807 12,475 -- 41,282
-------- -------- -------- -------- --------
Investing activities:
Acquisition of subsidiary -- -- -- -- --
Capital expenditures -- (19,193) (3,886) -- (23,079)
Proceeds from asset
dispositions -- 3,334 1,024 -- 4,358
Other -- -- -- -- --
-------- -------- -------- -------- --------
Net cash used for investing
Activities -- (15,859) (2,862) -- (18,721)
-------- -------- -------- -------- --------
Financing activities:
Proceeds from issuance of
long-term debt (314) -- 314 -- --
Payment of debt obligations -- (6,573) (10,645) -- (17,218)
Recapitalization expenditures -- -- -- -- --
Issuance of preferred stock, net 470 -- -- -- --
Stock transactions (301) -- -- -- (301)
Other (2,620) (32) -- -- (2,652)
Net change in intercompany
balances 3,235 (3,235) -- -- --
-------- -------- -------- -------- --------
Net cash used for by financing
activities -- (9,840) (10,331) -- (20,171)
-------- -------- -------- -------- --------
Net increase in cash -- 3,108 (718) -- 2,390
Effect of exchange rate changes
on cash -- (804) -- -- (804)
Cash, beginning of period -- 165 885 -- 1,050
-------- -------- -------- -------- --------
Cash, end of period $ -- $ 2,469 $ 167 -- $ 2,636
======== ======== ======== ======== ========
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
QUALITY DISTRIBUTION, LLC
----------------------------------
April 9, 2003 /S/ THOMAS L. FINKBINER
----------------------------------
THOMAS L. FINKBINER, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
(DULY AUTHORIZED OFFICER)
SUPPLEMENT INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15 (d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT
TO SECTION 12 OF THE ACT.
No annual report to security holders covering Registrant's last fiscal
year or proxy statement, form of proxy or other proxy soliciting material has
been sent to security holders covering the 2002 fiscal year or will be sent to
security holders subsequent to the filing of this report.
38
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
DATE SIGNATURE TITLE
April 9, 2003 /s/ Thomas L. Finkbiner President, Chief Executive Officer,
---------------------------------------- Chairman of the Board and Manager
Thomas L. Finkbiner (Principal Executive Officer)
April 9, 2003 /s/ Samuel M. Hensley Senior Vice President and Chief Financial Officer
---------------------------------------- (Principal Financial and
Samuel M. Hensley Accounting Officer)
April 9, 2003 /s/ Charlie J. O'Brien Manager
----------------------------------------
Charlie J. O'Brien
April 9, 2003 /s/ Richard J. Brandewie Manager
----------------------------------------
Richard J. Brandewie
April 9, 2003 /s/ Joshua J. Harris Manager
----------------------------------------
Joshua J. Harris
April 9, 2003 /s/ Michael D. Weiner Manager
----------------------------------------
Michael D. Weiner
April 9, 2003 /s/ Robert H. Falk Manager
----------------------------------------
Robert H. Falk
April 9, 2003 /s/ Marc J. Rowan Manager
----------------------------------------
Marc J. Rowan
April 9, 2003 /s/ John H. Kissick Manager
----------------------------------------
John H. Kissick
April 9, 2003 /s/ Marc Becker Manager
----------------------------------------
Marc Becker
April 9, 2003 /s/ Don Orris Manager
----------------------------------------
Don Orris
39
CERTIFICATIONS
I, Thomas L. Finkbiner, certify that:
1. I have reviewed this annual report on Form 10-K of Quality
Distribution, LLC;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 9, 2003
/s/ Thomas L. Finkbiner
- -----------------------------------------
THOMAS L. FINKBINER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
40
CERTIFICATIONS
I, Samuel M. Hensley, certify that:
7. I have reviewed this annual report on Form 10-K of Quality
Distribution, LLC;
8. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
9. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
10. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
11. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
12. The registrant's other certifying officers and I have
indicated in this annual report whether there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 9, 2003
/s/ Samuel M. Hensley
- -----------------------------------------
SAMUEL M. HENSLEY
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
41
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
3.1 Certificate of Formation dated May 14, 2002. Incorporated herein by reference to Exhibit No. 3.1 to Quality
Distribution, LLC's Registration Statement on Form S-4 filed with the Securities and Exchange Commission on August 14,
2002 Registration No. 333-98077.
3.2 Limited Liability Company Agreement of Quality Distribution, LLC dated as of May 15, 2002. Incorporated herein by
reference to Exhibit No. 3.2 to Quality Distribution, LLC's Registration Statement on Form S-4 filed with the
Securities and Exchange Commission on August 14, 2002 Registration No. 333-98077.
3.3 Bylaws of Quality Distribution, LLC adopted as of May 15, 2002. Incorporated herein by reference to Exhibit No. 3.3 to
Quality Distribution, LLC's Registration Statement on Form S-4 filed with the Securities and Exchange Commission on
August 14, 2002 Registration No. 333-98077.
4.1 Indenture, dated as of May 30, 2002, among Quality Distribution, LLC, the Guarantors named therein and The Bank of New
York, as Trustee (including form of 12 1/2% Senior Subordinated Secured Notes due 2008). Incorporated herein by
reference to Exhibit No. 4.1 to Quality Distribution, Inc. Current Report on Form 8-K filed with the Securities and
Exchange Commission on May 30, 2002 (File No. O-24180).
4.2 Form of Exchange Note (included as Exhibit B to Exhibit 4.1).
4.3 Indenture, dated as of June 9, 1998, among Quality Distribution, Inc., the Guarantors named therein and The Bank of New
York (as successor to the corporate assets of United States Trust Company of New York), as Trustee (including form of
guarantee of 10% Senior Subordinated Notes due 2006 and form of guarantee of Floating Interest Rate Subordinated Term
Securities due 2006). Incorporated herein by reference to Exhibit No. 4.2 to Quality Distribution, Inc.'s Registration
Statement on Form S-4 filed with the Securities and Exchange Commission on November 3, 1998 Registration No. 333-66711.
4.4 First Supplemental Indenture, dated as of August 28, 1998, among Quality Distribution, Inc., the Guarantors named
therein and The Bank of New York (as successor to the corporate assets of United States Trust Company of New York), as
Trustee to the Indenture dated as of June 9, 1998. Incorporated herein by reference to Exhibit No. 4.3 to Quality
Distribution, Inc.'s Registration Statement on Form S-4 filed with the Securities and Exchange Commission on November
3, 1998 Registration No. 333-66711.
4.5 Second Supplemental Indenture, dated as of May 30, 2002, among Quality Distribution, Inc., the Guarantors named therein
and The Bank of New York, as Trustee, to the Indenture dated as of June 9, 1998. Incorporated herein by reference to
Exhibit No. 4.2 to Quality Distribution, Inc.'s Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 30, 2002 (File No. O-24180).
4.6 Registration Rights Agreement, dated as of May 30, 2002, among Quality Distribution, LLC, the subsidiaries of QD LLC
set forth on Annex I thereto and The Bank of New York. Incorporated herein by reference to Exhibit No. 10.2 to Quality
Distribution, Inc.'s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 30, 2002 (File
No. O-24180).
42
EXHIBIT
NO. DESCRIPTION
4.7 Credit Agreement, dated as of June 9, 1998, and amended and restated as of August 28, 1998, between Quality
Distribution, Inc., Levy Transport, Ltd., the lenders party thereto and Credit Suisse First Boston, as administrative
agent. Incorporated herein by reference to Exhibit No. 4.2 to Quality Distribution, Inc.'s Registration Statement on
Form S-4 filed with the Securities and Exchange Commission on November 3, 1998 Registration No. 333-66711.
4.8 First Amendment to Credit Agreement dated as of September 1, 1998. Incorporated herein by reference to Exhibit No. 4.2
to Quality Distribution, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March
29, 2002.
4.9 Second Amendment to Credit Agreement dated as of November 19, 1999. Incorporated herein by reference to Exhibit No. 4.3
to Quality Distribution, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March
29, 2002.
4.10 Third Amendment to Credit Agreement dated as of May 23, 2001. Incorporated herein by reference to Exhibit No. 2.5 to
Quality Distribution, Inc.'s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 12,
2001.
4.11 Fourth Amendment to Credit Agreement dated as of December 14, 2001. Incorporated herein by reference to Exhibit No. 4.5
to Quality Distribution, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March
29, 2002.
4.12 Fifth Amendment to Credit Agreement dated as of April 5, 2002, among Quality Distribution, Inc., Quality Distribution,
LLC, Levy Transport Ltd./Levy Transport LTEE, the Guarantors named therein, the financial institutions from time to
time party thereto and Credit Suisse First Boston, as Administrative Agent. Incorporated herein by reference to Exhibit
No. 4.4 to Quality Distribution, Inc.'s Current Report on Form 8-K filed with the Securities and Exchange Commission on
May 30, 2002 (File No. O-24180).
4.13 U.S. Security Agreement dated as of June 9, 1998, amended and restated as of August 28, 1998 and amended and restated
as of May 30, 2002, among Quality Distribution, LLC, Quality Distribution, Inc., various subsidiaries of Quality
Distribution, LLC and Credit Suisse First Boston, as collateral agent. Incorporated herein by reference to Exhibit No.
4.13 to Quality Distribution, LLC's Registration Statement on Form S-4 filed with the Securities and Exchange
Commission on August 14, 2002 Registration No. 333-98077.
10.1 Amended and Restated Shareholders' Agreement, dated as of February 10, 1998, among MTL, Apollo Investment Fund III,
L.P., Apollo Overseas Partners III, L.P., Apollo U.K. Fund III, L.P. and certain shareholders of QDI. Incorporated
herein by reference to Exhibit No. 4.13 to Quality Distribution, Inc.'s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 29, 2002.
10.2 Amended and Restated Common and Preferred Stock Purchase and Shareholders' Agreement, dated as of August 28, 1998,
among BT Investment Partners, Inc., MTL Equity Investors, L.L.C., Apollo Investment Fund III, L.P., Apollo Overseas
Partners III, L.P., Apollo U.K. Fund III, L.P. and MTL. Incorporated herein by reference to Exhibit No. 4.14 to Quality
Distribution, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2002.
43
EXHIBIT
NO. DESCRIPTION
10.3 Amendment No. 1, dated as of April 2, 2002, to the Amended and Restated Common and Preferred Stock Purchase and
Shareholders' Agreement, dated as of August 28, 1998, among BT Investment Partners, Inc., MTL Equity Investors, L.L.C.,
Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., Apollo U.K. Fund III, L.P. and MTL. Incorporated
herein by reference to Exhibit No. 10.3 to Quality Distribution, LLC's Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on August 14, 2002 Registration No. 333-98077.
10.4 Second Amended and Restated Registration Rights Agreement, dated as of August 28, 1998, among Apollo Investment Fund
III, L.P., Apollo Overseas Partners III, L.P., Apollo U.K. Fund III, L.P., QDI and certain shareholders of QDI.
Incorporated herein by reference to Exhibit No. 10.4 to Quality Distribution, LLC's Registration Statement on Form S-4
filed with the Securities and Exchange Commission on August 14, 2002 Registration No. 333-98077.
10.5 Agreement, dated as of May 30, 2002, among Apollo Investment Fund III, L.P., Apollo Overseas Partners III, L.P., Apollo
U.K. Fund III, L.P., QDI and certain shareholders of QDI. Incorporated herein by reference to Exhibit No. 10.5 to
Quality Distribution, LLC's Registration Statement on Form S-4 filed with the Securities and Exchange Commission on
August 14, 2002 Registration No. 333-98077.
10.6 1998 Stock Option Plan of QDI. Incorporated herein by reference to Exhibit No. 10.1 to Quality Distribution, Inc.'s
Registration Statement on Form S-4 filed with the Securities and Exchange Commission on November 3, 1998 Registration
No. 333-66711.
10.7 Employment Agreement, dated as of February 10, 1998, between MTL and Richard J. Brandewie. Incorporated herein by
reference to Exhibit No. 10.2 to Quality Distribution, Inc.'s Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 29, 2002.
10.8 Employment Agreement, dated November 8, 1999, between Quality Distribution, Inc. and Thomas L. Finkbiner. Incorporated
herein by reference to Exhibit No. 10.3 to Quality Distribution, Inc.'s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 29, 2002.
10.9 Employment Agreement, dated November 19, 2000, between Quality Distribution, Inc. and Douglas B. Allen, as revised on
November 27, 2000. Incorporated herein by reference to Exhibit No. 10.4 to Quality Distribution, Inc.'s Annual Report
on Form 10-K filed with the Securities and Exchange Commission on March 29, 2002.
10.10 Employment Agreement, dated March 23, 2000, between Quality Distribution, Inc. and Dennis R. Farnsworth. Incorporated
herein by reference to Exhibit No. 10.5 to Quality Distribution, Inc.'s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 29, 2002.
10.11 Employment Agreement, dated March 27, 2000, between Quality Distribution, Inc. and Virgil T. Leslie. Incorporated
herein by reference to Exhibit No. 10.6 to Quality Distribution, Inc.'s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 29, 2002.
10.12 Employment Agreement, dated June 23, 1998, between Quality Distribution, Inc. and Dennis R. Copeland. Incorporated
herein by reference to Exhibit No. 10.7 to Quality Distribution, Inc.'s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 29, 2002.
44
EXHIBIT
NO. DESCRIPTION
10.13 Employment Agreement, dated February 10, 1998, between Quality Distribution, Inc. and Charles J. O'Brien. Incorporated
herein by reference to Exhibit No. 10.2 to Quality Distribution, Inc.'s Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on November 3, 1998 Registration No. 333-66711.
10.14 Supplemental Letter, dated as of February 10, 1998, between Quality Distribution, Inc. and Charles J. O'Brien.
Incorporated herein by reference to Exhibit No. 10.3 to Quality Distribution, Inc.'s Registration Statement on Form S-4
filed with the Securities and Exchange Commission on November 3, 1998 Registration No. 333-66711.
10.15 Amendment dated January 13, 2000 to Employment Agreement between Quality Distribution, Inc. and Charles J. O'Brien.
Incorporated herein by reference to Exhibit No. 10.10 to Quality Distribution, Inc.'s Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 29, 2002.
10.16 Amendment, dated October 23, 2001, to Employment Agreement dated February 10, 1998 between Quality Distribution, Inc.
and Charles J. O'Brien. Incorporated herein by reference to Exhibit No. 10.12 to Quality Distribution, Inc.'s Annual
Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2002.
10.17 Stock Option Agreement, dated November 19, 2000, between Douglas B. Allen and Quality Distribution, Inc. Incorporated
herein by reference to Exhibit No. 10.13 to Quality Distribution, Inc.'s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 29, 2002.
10.18 Promissory Note, dated November 8, 1999, issued by Thomas L. Finkbiner to Quality Distribution, Inc. Incorporated
herein by reference to Exhibit No. 10.14 to Quality Distribution, Inc.'s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 29, 2002.
10.19 Pledge Agreement, dated November 8, 1999, between Thomas L. Finkbiner and Quality Distribution, Inc. Incorporated
herein by reference to Exhibit No. 10.15 to Quality Distribution, Inc.'s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 29, 2002.
10.20 Stock Option Agreement, dated November 8, 1999, between Thomas L. Finkbiner and Quality Distribution, Inc. Incorporated
herein by reference to Exhibit No. 10.16 to Quality Distribution, Inc.'s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 29, 2002.
10.21 Non Competition Agreement, dated February 10, 1998, between Quality Distribution, Inc. and Elton E. Babbit.
Incorporated herein by reference to Exhibit No. 10.8 to Quality Distribution, Inc.'s Registration Statement on Form S-4
filed with the Securities and Exchange Commission on November 3, 1998 Registration No. 333-66711.
10.22 Non Competition Agreement, dated February 10, 1998, between Quality Distribution, Inc. and Gordon Babbit. Incorporated
herein by reference to Exhibit No. 10.9 to Quality Distribution, Inc.'s Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on November 3, 1998 Registration No. 333-66711.
45
EXHIBIT
NO. DESCRIPTION
10.23 Management Agreement, dated February 10, 1998, between Apollo Management, L.P. and Quality Distribution, Inc.
Incorporated herein by reference to Exhibit No. 10.10 to Quality Distribution, Inc.'s Registration Statement on Form
S-4 filed with the Securities and Exchange Commission on November 3, 1998 Registration No. 333-66711.
10.24 Limited Recourse Secured Promissory Note, dated June 9, 1998, issued by Marvin Sexton to Quality Distribution, Inc. and
corresponding pledge agreement. Incorporated herein by reference to Exhibit No. 10.11 to Quality Distribution, Inc.'s
Registration Statement on Form S-4 filed with the Securities and Exchange Commission on November 3, 1998 Registration
No. 333-66711.
10.25 Consulting Agreement, dated February 10, 1998, between Quality Distribution, Inc. and Elton E. Babbit. Incorporated
herein by reference to Exhibit No. 10.6 to Quality Distribution, Inc.'s Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on November 3, 1998 Registration No. 333-66711.
10.26 Contribution Agreement dated May 30, 2002, between Quality Distribution, LLC and Quality Distribution, Inc.
Incorporated herein by reference to Exhibit No. 10.26 to Quality Distribution, LLC's Registration Statement on Form S-4
filed with the Securities and Exchange Commission on August 14, 2002 Registration No. 333-98077.
10.27 Lock-Up Agreement, dated as of April 10, 2002, and Amendment No. 1 thereto dated as of May 30, 2002, among Quality
Distribution, Inc., ARES Leveraged Investment Fund, L.P. and ARES Leveraged Investment Fund II, L.P. Incorporated
herein by reference to Exhibit No. 10.27 to Quality Distribution, LLC's Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on August 14, 2002 Registration No. 333-98077.
10.28 Lock-Up and Purchase Agreement, dated as of April 10, 2002, among Quality Distribution, Inc., Apollo Investment Fund
III, L.P., Apollo Overseas Partners III, L.P. and Apollo (U.K.) Partners III, L.P. Incorporated herein by reference to
Exhibit No. 10.28 to Quality Distribution, LLC's Registration Statement on Form S-4 filed with the Securities and
Exchange Commission on August 14, 2002 Registration No. 333-98077.
10.29 Lock-up Agreement, dated as of April 10, 2002, among Quality Distribution, Inc. and the members of management listed on
the signature page thereto. Incorporated herein by reference to Exhibit No. 10.29 to Quality Distribution, LLC's
Registration Statement on Form S-4 filed with the Securities and Exchange Commission on August 14, 2002 Registration
No. 333-98077
10.30 Employment Agreement, dated June 23, 1998 between QDI, Inc. and Michael Grimm
10.31 Employment Agreement, dated April 10, 2000 between QDI, Inc. and Keith Margelowski
21.1 Subsidiaries of Quality Distribution, LLC.
99.1 Certification by the Chief Executive Officer of Quality Distribution, LLC pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by the Chief Financial Officer of Quality Distribution, LLC pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
46